Today we are going to look at BE Semiconductor Industries N.V. (AMS:BESI) 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 of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. 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.’
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 BE Semiconductor Industries:
0.26 = €173m ÷ (€773m – €101m) (Based on the trailing twelve months to December 2018.)
So, BE Semiconductor Industries has an ROCE of 26%.
Is BE Semiconductor Industries’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that BE Semiconductor Industries’s ROCE is meaningfully better than the 9.4% average in the Semiconductor industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, BE Semiconductor Industries’s ROCE in absolute terms currently looks quite high.
As we can see, BE Semiconductor Industries currently has an ROCE of 26% compared to its ROCE 3 years ago, which was 15%. This makes us think about whether the company has been reinvesting shrewdly.
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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BE Semiconductor Industries.
How BE Semiconductor Industries’s Current Liabilities Impact 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
BE Semiconductor Industries has total liabilities of €101m and total assets of €773m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On BE Semiconductor Industries’s ROCE
This is good to see, and with such a high ROCE, BE Semiconductor Industries may be worth a closer look. You might be able to find a better buy than BE Semiconductor Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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.