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Today we are going to look at IEC Electronics Corp. (NYSEMKT:IEC) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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’.
How Do You Calculate Return On Capital Employed?
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 IEC Electronics:
0.10 = US$2.7m ÷ (US$97m – US$42m) (Based on the trailing twelve months to December 2018.)
Therefore, IEC Electronics has an ROCE of 10%.
Is IEC Electronics’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that IEC Electronics’s ROCE is fairly close to the Electronic industry average of 11%. Setting aside the industry comparison for now, IEC Electronics’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, IEC Electronics’s ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 5.6%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 free report on analyst forecasts for IEC Electronics.
What Are Current Liabilities, And How Do They Affect IEC Electronics’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
IEC Electronics has total assets of US$97m and current liabilities of US$42m. As a result, its current liabilities are equal to approximately 44% of its total assets. IEC Electronics has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On IEC Electronics’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course you might be able to find a better stock than IEC Electronics. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like IEC Electronics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.com.