Today we'll evaluate Entegris, Inc. (NASDAQ:ENTG) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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'.
How Do You Calculate Return On Capital Employed?
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 Entegris:
0.13 = US$292m ÷ (US$2.5b - US$213m) (Based on the trailing twelve months to September 2019.)
So, Entegris has an ROCE of 13%.
Is Entegris's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Entegris's ROCE is meaningfully higher than the 10% average in the Semiconductor industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Entegris's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Entegris's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 9.6%. This makes us wonder if the company is improving. You can see in the image below how Entegris's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Entegris.
Entegris'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Entegris has total assets of US$2.5b and current liabilities of US$213m. Therefore its current liabilities are equivalent to approximately 8.6% of its total assets. Low current liabilities have only a minimal impact on Entegris's ROCE, making its decent returns more credible.
The Bottom Line On Entegris's ROCE
This is good to see, and while better prospects may exist, Entegris seems worth researching further. Entegris shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 firstname.lastname@example.org. 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.