Yahoo Finance Skyworks Solutions, Inc. (NASDAQ:SWKS) Earns A Nice Return On Capital Employed
Today we'll look at Skyworks Solutions, Inc. (NASDAQ:SWKS) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Skyworks Solutions:
0.24 = US$1.0b ÷ (US$4.8b - US$397m) (Based on the trailing twelve months to June 2019.)
Therefore, Skyworks Solutions has an ROCE of 24%.
See our latest analysis for Skyworks Solutions
Is Skyworks Solutions's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Skyworks Solutions's ROCE is meaningfully better 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. Regardless of the industry comparison, in absolute terms, Skyworks Solutions's ROCE currently appears to be excellent.
The image below shows how Skyworks Solutions's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Skyworks Solutions.
Skyworks Solutions's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Skyworks Solutions has total assets of US$4.8b and current liabilities of US$397m. As a result, its current liabilities are equal to approximately 8.2% of its total assets. Minimal current liabilities are not distorting Skyworks Solutions's impressive ROCE.
The Bottom Line On Skyworks Solutions's ROCE
This suggests the company would be worth researching in more depth. There might be better investments than Skyworks Solutions out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
