Today we'll look at PCTEL, Inc. (NASDAQ:PCTI) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from 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. 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?
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 PCTEL:
0.041 = US$3.0m ÷ (US$83m - US$9.8m) (Based on the trailing twelve months to March 2020.)
So, PCTEL has an ROCE of 4.1%.
Is PCTEL's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, PCTEL's ROCE appears meaningfully below the 6.8% average reported by the Communications industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how PCTEL compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. Readers may wish to look for more rewarding investments.
Our data shows that PCTEL currently has an ROCE of 4.1%, compared to its ROCE of 0.4% 3 years ago. This makes us wonder if the company is improving. The image below shows how PCTEL's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do PCTEL's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
PCTEL has current liabilities of US$9.8m and total assets of US$83m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On PCTEL's ROCE
PCTEL has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like PCTEL 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 firstname.lastname@example.org. 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.
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