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Today we’ll evaluate u-blox Holding AG (

VTX:UBXN

) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding 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. 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?

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 u-blox Holding:

0.13 = CHF65m ÷ (CHF558m – CHF63m) (Based on the trailing twelve months to June 2018.)

Therefore,

u-blox Holding has an ROCE of 13%.

View our latest analysis for u-blox Holding

Does u-blox Holding Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that u-blox Holding’s ROCE is meaningfully better than the 8.9% average in the Semiconductor industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where u-blox Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

SWX:UBXN Last Perf February 1st 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our

free

report on analyst forecasts for the company

.

How u-blox Holding’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Story continues

u-blox Holding has total assets of CHF558m and current liabilities of CHF63m. Therefore its current liabilities are equivalent to approximately 11% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From u-blox Holding’s ROCE

This is good to see, and with a sound ROCE, u-blox Holding could be worth a closer look. 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).

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 protected]

.

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