Today we'll look at Abiomed, Inc. (NASDAQ:ABMD) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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'.
How Do You Calculate Return On Capital Employed?
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 Abiomed:
0.24 = US$256m ÷ (US$1.2b - US$126m) (Based on the trailing twelve months to December 2019.)
Therefore, Abiomed has an ROCE of 24%.
View our latest analysis for Abiomed
Does Abiomed Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Abiomed's ROCE is meaningfully higher than the 9.3% average in the Medical Equipment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Abiomed's ROCE is currently very good.
We can see that, Abiomed currently has an ROCE of 24% compared to its ROCE 3 years ago, which was 18%. This makes us think the business might be improving. The image below shows how Abiomed's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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 Abiomed.
Abiomed's Current Liabilities And Their Impact On Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Abiomed has total assets of US$1.2b and current liabilities of US$126m. As a result, its current liabilities are equal to approximately 11% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Abiomed's ROCE
With low current liabilities and a high ROCE, Abiomed could be worthy of further investigation. There might be better investments than Abiomed 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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