Yahoo Finance Is MKS Instruments, Inc.'s (NASDAQ:MKSI) Capital Allocation Ability Worth Your Time?
Today we are going to look at MKS Instruments, Inc. (NASDAQ:MKSI) to see whether it might be an attractive investment prospect. 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 measures the 'return' (pre-tax profit) a company generates from 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 MKS Instruments:
0.099 = US$300m ÷ (US$3.4b - US$311m) (Based on the trailing twelve months to September 2019.)
Therefore, MKS Instruments has an ROCE of 9.9%.
View our latest analysis for MKS Instruments
Is MKS Instruments's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see MKS Instruments's ROCE is around the 10% average reported by the Semiconductor industry. Setting aside the industry comparison for now, MKS Instruments's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, MKS Instruments's ROCE appears to be 9.9%, compared to 3 years ago, when its ROCE was 7.8%. This makes us wonder if the company is improving. You can see in the image below how MKS Instruments's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. 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 MKS Instruments.
What Are Current Liabilities, And How Do They Affect MKS Instruments's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
MKS Instruments has total assets of US$3.4b and current liabilities of US$311m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. With low levels of current liabilities, at least MKS Instruments's mediocre ROCE is not unduly boosted.
What We Can Learn From MKS Instruments's ROCE
Based on this information, MKS Instruments appears to be a mediocre business. 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.
