Is There More To IEC Electronics Corp. (NYSEMKT:IEC) Than Its 10% Returns On Capital?

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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. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. 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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 IEC Electronics:

0.10 = US$5.7m ÷ (US$97m – US$42m) (Based on the trailing twelve months to December 2018.)

So, IEC Electronics has an ROCE of 10%.

View our latest analysis for IEC Electronics

Is IEC Electronics’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, IEC Electronics’s ROCE appears to be around the 12% average of the Electronic industry. Separate from how IEC Electronics 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.

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.

AMEX:IEC Past Revenue and Net Income, May 10th 2019
AMEX:IEC Past Revenue and Net Income, May 10th 2019

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. 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.

How IEC Electronics’s Current Liabilities Impact 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. 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 counteract this, we check 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. Therefore its current liabilities are equivalent to approximately 44% of its total assets. IEC Electronics’s ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On IEC Electronics’s ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list 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 free list of companies. (Hint: insiders have been buying them).

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 editorial-team@simplywallst.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.