Here’s why Qorvo, Inc.’s (NASDAQ:QRVO) Returns On Capital Matters So Much
Today we'll look at Qorvo, Inc. (NASDAQ:QRVO) 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Qorvo:
0.054 = US$288m ÷ (US$5.8b - US$436m) (Based on the trailing twelve months to March 2019.)
So, Qorvo has an ROCE of 5.4%.
See our latest analysis for Qorvo
Does Qorvo Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Qorvo's ROCE appears to be significantly below the 12% average in the Semiconductor industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Qorvo stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
We can see that , Qorvo currently has an ROCE of 5.4% compared to its ROCE 3 years ago, which was 0.8%. This makes us wonder if the company is improving. The image below shows how Qorvo's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Qorvo.
Qorvo'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Qorvo has total liabilities of US$436m and total assets of US$5.8b. As a result, its current liabilities are equal to approximately 7.5% of its total assets. Qorvo has a low level of current liabilities, which have a negligible impact on its already low ROCE.
The Bottom Line On Qorvo's ROCE
Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than Qorvo. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
