Why We’re Not Impressed By Quantenna Communications, Inc.’s (NASDAQ:QTNA) 1.3% ROCE
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Today we are going to look at Quantenna Communications, Inc. (NASDAQ:QTNA) 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Quantenna Communications:
0.013 = US$2.8m ÷ (US$246m – US$36m) (Based on the trailing twelve months to December 2018.)
Therefore, Quantenna Communications has an ROCE of 1.3%.
Check out our latest analysis for Quantenna Communications
Does Quantenna Communications Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Quantenna Communications’s ROCE appears to be significantly below the 8.0% average in the Communications industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Quantenna Communications stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Quantenna Communications delivered an ROCE of 1.3%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Quantenna Communications.
What Are Current Liabilities, And How Do They Affect Quantenna Communications’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Quantenna Communications has total liabilities of US$36m and total assets of US$246m. As a result, its current liabilities are equal to approximately 15% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Quantenna Communications’s ROCE
While that is good to see, Quantenna Communications has a low ROCE and does not look attractive in this analysis. 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.
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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.
