Why We’re Not Impressed By NXP Semiconductors N.V.’s (NASDAQ:NXPI) 4.8% ROCE

Today we'll look at NXP Semiconductors N.V. (NASDAQ:NXPI) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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 the end, ROCE is a valuable metric that has its flaws. 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 NXP Semiconductors:

0.048 = US$612m ÷ (US$21b - US$3.6b) (Based on the trailing twelve months to September 2018.)

So, NXP Semiconductors has an ROCE of 4.8%.

See our latest analysis for NXP Semiconductors

Is NXP Semiconductors's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, NXP Semiconductors's ROCE appears meaningfully below the 14% average reported by the Semiconductor industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how NXP Semiconductors compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. It is likely that there are more attractive prospects out there.

NXP Semiconductors's current ROCE of 4.8% is lower than its ROCE in the past, which was 20%, 3 years ago. 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. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for NXP Semiconductors.

What Are Current Liabilities, And How Do They Affect NXP Semiconductors's 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 counter this, investors can check if a company has high current liabilities relative to total assets.

NXP Semiconductors has total liabilities of US$3.6b and total assets of US$21b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On NXP Semiconductors's ROCE

NXP Semiconductors has a poor ROCE, and there may be better investment prospects out there. Of course you might be able to find a better stock than NXP Semiconductors. So you may wish to see this freecollection of other companies that have grown earnings strongly.

Of course NXP Semiconductors may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.