Today we are going to look at Atrion Corporation (NASDAQ:ATRI) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 Atrion:
0.19 = US$42m ÷ (US$231m – US$10m) (Based on the trailing twelve months to December 2018.)
So, Atrion has an ROCE of 19%.
Does Atrion Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Atrion’s ROCE is meaningfully higher than the 11% average in the Medical Equipment industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Atrion sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Atrion’s current ROCE of 19% is lower than 3 years ago, when the company reported a 27% ROCE. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Atrion is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Atrion’s Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Atrion has total liabilities of US$10m and total assets of US$231m. As a result, its current liabilities are equal to approximately 4.4% of its total assets. With low current liabilities, Atrion’s decent ROCE looks that much more respectable.
The Bottom Line On Atrion’s ROCE
This is good to see, and while better prospects may exist, Atrion seems worth researching further. You might be able to find a better buy than Atrion. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.