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Is Sanmina Corporation’s (NASDAQ:SANM) Return On Capital Employed Any Good?

Simply Wall St

Today we are going to look at Sanmina Corporation (NASDAQ:SANM) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

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

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. 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'.

So, How Do We Calculate ROCE?

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 Sanmina:

0.13 = US$285m ÷ (US$4.0b - US$1.8b) (Based on the trailing twelve months to June 2019.)

Therefore, Sanmina has an ROCE of 13%.

See our latest analysis for Sanmina

Does Sanmina Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Sanmina's ROCE is fairly close to the Electronic industry average of 12%. Separate from Sanmina's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, Sanmina's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 9.9%. This makes us wonder if the company is improving. The image below shows how Sanmina's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:SANM Past Revenue and Net Income, October 3rd 2019

When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Sanmina's Current Liabilities And Their Impact On 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.

Sanmina has total assets of US$4.0b and current liabilities of US$1.8b. As a result, its current liabilities are equal to approximately 45% of its total assets. With this level of current liabilities, Sanmina's ROCE is boosted somewhat.

What We Can Learn From Sanmina's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Sanmina 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.

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 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.