Yahoo Finance Why You Should Like Elmos Semiconductor AG’s (ETR:ELG) ROCE
Today we'll look at Elmos Semiconductor AG (ETR:ELG) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 Elmos Semiconductor:
0.17 = €55m ÷ (€380m - €48m) (Based on the trailing twelve months to June 2019.)
So, Elmos Semiconductor has an ROCE of 17%.
Check out our latest analysis for Elmos Semiconductor
Does Elmos Semiconductor Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Elmos Semiconductor's ROCE is meaningfully higher than the 11% average in the Semiconductor industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Elmos Semiconductor compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , Elmos Semiconductor currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 7.1%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Elmos Semiconductor'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Elmos Semiconductor.
Elmos Semiconductor's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
Elmos Semiconductor has total liabilities of €48m and total assets of €380m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Elmos Semiconductor's ROCE
With that in mind, Elmos Semiconductor's ROCE appears pretty good. There might be better investments than Elmos Semiconductor 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.
I will like Elmos Semiconductor better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
