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Today we are going to look at PCM, Inc. (NASDAQ:PCMI) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 PCM:
0.21 = US$41m ÷ (US$721m - US$520m) (Based on the trailing twelve months to December 2018.)
So, PCM has an ROCE of 21%.
Is PCM's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, PCM's ROCE is meaningfully higher than the 11% average in the Electronic industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where PCM sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, PCM's ROCE appears to be 21%, compared to 3 years ago, when its ROCE was 0.5%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 PCM.
How PCM's Current Liabilities Impact 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
PCM has total assets of US$721m and current liabilities of US$520m. Therefore its current liabilities are equivalent to approximately 72% of its total assets. PCM has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On PCM's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Of course you might be able to find a better stock than PCM. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 email@example.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.