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Today we’ll look at Perceptron, Inc. (NASDAQ:PRCP) 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. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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’.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Perceptron:
0.11 = US$5.6m ÷ (US$75m – US$24m) (Based on the trailing twelve months to September 2018.)
Therefore, Perceptron has an ROCE of 11%.
Is Perceptron’s ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Perceptron’s ROCE is fairly close to the Electronic industry average of 11%. Separate from Perceptron’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, Perceptron currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 2.7%. This makes us think the business might be 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Perceptron.
Do Perceptron’s Current Liabilities Skew 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Perceptron has total liabilities of US$24m and total assets of US$75m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Perceptron has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Perceptron’s ROCE
Perceptron’s ROCE does look good, but the level of current liabilities also contribute to that. You might be able to find a better buy than Perceptron. 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).
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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 firstname.lastname@example.org.