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# Should You Like Maxim Integrated Products, Inc.’s (NASDAQ:MXIM) High Return On Capital Employed?

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Today we'll look at Maxim Integrated Products, Inc. (NASDAQ:MXIM) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

### Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

### How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Maxim Integrated Products:

0.24 = US\$801m ÷ (US\$3.8b - US\$399m) (Based on the trailing twelve months to March 2019.)

So, Maxim Integrated Products has an ROCE of 24%.

### Is Maxim Integrated Products's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Maxim Integrated Products's ROCE appears to be substantially greater than the 11% average in the Semiconductor industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Maxim Integrated Products's ROCE currently appears to be excellent.

As we can see, Maxim Integrated Products currently has an ROCE of 24% compared to its ROCE 3 years ago, which was 14%. This makes us wonder if the company is improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Maxim Integrated Products.

### Maxim Integrated Products's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Maxim Integrated Products has total assets of US\$3.8b and current liabilities of US\$399m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

### What We Can Learn From Maxim Integrated Products's ROCE

Low current liabilities and high ROCE is a good combination, making Maxim Integrated Products look quite interesting. Maxim Integrated Products looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.