Today we are going to look at Maxim Integrated Products, Inc. (NASDAQ:MXIM) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Maxim Integrated Products:
0.25 = US$870m ÷ (US$3.9b – US$406m) (Based on the trailing twelve months to December 2018.)
Therefore, Maxim Integrated Products has an ROCE of 25%.
Is Maxim Integrated Products’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Maxim Integrated Products’s ROCE appears to be substantially greater than the 12% average in the Semiconductor 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 the industry comparison, in absolute terms, Maxim Integrated Products’s ROCE currently appears to be excellent.
As we can see, Maxim Integrated Products currently has an ROCE of 25% compared to its ROCE 3 years ago, which was 14%. This makes us wonder if the company is improving.
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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Maxim Integrated Products’s Current Liabilities Impact 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. 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.
Maxim Integrated Products has total liabilities of US$406m and total assets of US$3.9b. As a result, its current liabilities are equal to approximately 10% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
What We Can Learn From Maxim Integrated Products’s ROCE
Low current liabilities and high ROCE is a good combination, making Maxim Integrated Products look quite interesting. There might be better investments than Maxim Integrated Products 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.
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