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Today we’ll look at BE Semiconductor Industries N.V. (AMS:BESI) 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.
First, we’ll go over how we 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 is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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 BE Semiconductor Industries:
0.30 = €209m ÷ (€784m – €120m) (Based on the trailing twelve months to September 2018.)
So, BE Semiconductor Industries has an ROCE of 30%.
Is BE Semiconductor Industries’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that BE Semiconductor Industries’s ROCE is meaningfully better than the 8.9% average in the Semiconductor industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, BE Semiconductor Industries’s ROCE in absolute terms currently looks quite high.
In our analysis, BE Semiconductor Industries’s ROCE appears to be 30%, compared to 3 years ago, when its ROCE was 16%. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
BE Semiconductor Industries’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
BE Semiconductor Industries has total assets of €784m and current liabilities of €120m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
What We Can Learn From BE Semiconductor Industries’s ROCE
Low current liabilities and high ROCE is a good combination, making BE Semiconductor Industries look quite interesting. Of course you might be able to find a better stock than BE Semiconductor Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.