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What We Think Of Inogen, Inc.’s (NASDAQ:INGN) Investment Potential

Simply Wall St

Today we are going to look at Inogen, Inc. (NASDAQ:INGN) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. 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?

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 Inogen:

0.077 = US$31m ÷ (US$445m - US$50m) (Based on the trailing twelve months to September 2019.)

So, Inogen has an ROCE of 7.7%.

Check out our latest analysis for Inogen

Is Inogen's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Inogen's ROCE is around the 8.9% average reported by the Medical Equipment industry. Aside from the industry comparison, Inogen's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Inogen's current ROCE of 7.7% is lower than its ROCE in the past, which was 12%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Inogen's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:INGN Past Revenue and Net Income, December 23rd 2019
NasdaqGS:INGN Past Revenue and Net Income, December 23rd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Inogen.

How Inogen's Current Liabilities Impact 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Inogen has total liabilities of US$50m and total assets of US$445m. As a result, its current liabilities are equal to approximately 11% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Inogen's ROCE

That said, Inogen's ROCE is mediocre, there may be more attractive investments around. 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.