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Is There More To Penumbra, Inc. (NYSE:PEN) Than Its 8.3% Returns On Capital?

Simply Wall St
·4 min read

Today we are going to look at Penumbra, Inc. (NYSE:PEN) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Penumbra:

0.083 = US$44m ÷ (US$614m - US$86m) (Based on the trailing twelve months to September 2019.)

So, Penumbra has an ROCE of 8.3%.

View our latest analysis for Penumbra

Does Penumbra Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Penumbra's ROCE appears to be around the 9.0% average of the Medical Equipment industry. Separate from how Penumbra stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

We can see that, Penumbra currently has an ROCE of 8.3% compared to its ROCE 3 years ago, which was 0.6%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Penumbra's past growth compares to other companies.

NYSE:PEN Past Revenue and Net Income, February 12th 2020
NYSE:PEN Past Revenue and Net Income, February 12th 2020

When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Penumbra.

Do Penumbra's Current Liabilities Skew 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Penumbra has current liabilities of US$86m and total assets of US$614m. As a result, its current liabilities are equal to approximately 14% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

The Bottom Line On Penumbra's ROCE

With that in mind, we're not overly impressed with Penumbra's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than Penumbra. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Penumbra better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.