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Today we’ll look at Gilat Satellite Networks Ltd. (NASDAQ:GILT) 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 up, we’ll look at what ROCE is and how we calculate it. 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. All else being equal, a better business will have a higher ROCE. 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 Gilat Satellite Networks:
0.094 = US$22m ÷ (US$395m – US$161m) (Based on the trailing twelve months to March 2019.)
Therefore, Gilat Satellite Networks has an ROCE of 9.4%.
Is Gilat Satellite Networks’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Gilat Satellite Networks’s ROCE is meaningfully better than the 7.6% average in the Communications industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from how Gilat Satellite Networks stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Gilat Satellite Networks has an ROCE of 9.4%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. How cyclical is Gilat Satellite Networks? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Gilat Satellite Networks’s Current Liabilities And Their Impact On 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.
Gilat Satellite Networks has total liabilities of US$161m and total assets of US$395m. As a result, its current liabilities are equal to approximately 41% of its total assets. Gilat Satellite Networks has a medium level of current liabilities, which would boost its ROCE somewhat.
Our Take On Gilat Satellite Networks’s ROCE
Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might also be able to find a better stock than Gilat Satellite Networks. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 email@example.com. 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.