Today we'll look at Helios Technologies, Inc. (NASDAQ:HLIO) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Helios Technologies:
0.11 = US$102m ÷ (US$1.0b - US$76m) (Based on the trailing twelve months to September 2019.)
So, Helios Technologies has an ROCE of 11%.
Is Helios Technologies's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Helios Technologies's ROCE appears to be around the 11% average of the Machinery industry. Separate from Helios Technologies's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Helios Technologies's current ROCE of 11% is lower than 3 years ago, when the company reported a 15% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Helios Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Helios Technologies.
How Helios Technologies's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Helios Technologies has total liabilities of US$76m and total assets of US$1.0b. Therefore its current liabilities are equivalent to approximately 7.5% of its total assets. With low current liabilities, Helios Technologies's decent ROCE looks that much more respectable.
What We Can Learn From Helios Technologies's ROCE
If it is able to keep this up, Helios Technologies could be attractive. Helios Technologies 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.
I will like Helios Technologies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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