Is Kimball Electronics, Inc. (NASDAQ:KE) Better Than Average At Deploying Capital?

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Today we'll look at Kimball Electronics, Inc. (NASDAQ:KE) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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 Kimball Electronics:

0.11 = US$44m ÷ (US$663m - US$280m) (Based on the trailing twelve months to September 2018.)

So, Kimball Electronics has an ROCE of 11%.

View our latest analysis for Kimball Electronics

Does Kimball Electronics Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Kimball Electronics's ROCE is around the 11% average reported by the Electronic industry. Separate from Kimball Electronics's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. If Kimball Electronics is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Kimball Electronics's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Kimball Electronics has total liabilities of US$280m and total assets of US$663m. Therefore its current liabilities are equivalent to approximately 42% of its total assets. With this level of current liabilities, Kimball Electronics's ROCE is boosted somewhat.

The Bottom Line On Kimball Electronics's ROCE

Kimball Electronics's ROCE does look good, but the level of current liabilities also contribute to that. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).

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.