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Here’s why Himax Technologies, Inc.’s (NASDAQ:HIMX) Returns On Capital Matters So Much

Simply Wall St

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Today we are going to look at Himax Technologies, Inc. (NASDAQ:HIMX) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. 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 measures the amount of pre-tax profits a company can generate from the 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. 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 Himax Technologies:

0.008 = US$3.6m ÷ (US$837m - US$391m) (Based on the trailing twelve months to December 2018.)

Therefore, Himax Technologies has an ROCE of 0.8%.

Check out our latest analysis for Himax Technologies

Is Himax Technologies's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Himax Technologies's ROCE appears meaningfully below the 11% average reported by the Semiconductor industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Himax Technologies compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.

Himax Technologies's current ROCE of 0.8% is lower than 3 years ago, when the company reported a 6.8% ROCE. Therefore we wonder if the company is facing new headwinds.

NasdaqGS:HIMX Past Revenue and Net Income, May 9th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Himax Technologies.

Himax Technologies'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.

Himax Technologies has total assets of US$837m and current liabilities of US$391m. Therefore its current liabilities are equivalent to approximately 47% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Himax Technologies's ROCE is concerning.

The Bottom Line On Himax Technologies's ROCE

This company may not be the most attractive investment prospect. 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 Himax Technologies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.