What Can We Make Of Quanta Computer Inc.’s (TPE:2382) High Return On Capital? – Simply Wall St News
Today we’ll look at Quanta Computer Inc. (TPE:2382) 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, we’ll go over how we calculate ROCE. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Quanta Computer:
0.11 = NT$19b ÷ (NT$554b – NT$390b) (Based on the trailing twelve months to March 2020.)
Therefore, Quanta Computer has an ROCE of 11%.
View our latest analysis for Quanta Computer
Does Quanta Computer Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Quanta Computer’s ROCE is meaningfully higher than the 9.5% average in the Tech industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Quanta Computer compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Quanta Computer’s ROCE compares to its industry. Click to see more on past growth.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Quanta Computer.
Do Quanta Computer’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Quanta Computer has current liabilities of NT$390b and total assets of NT$554b. Therefore its current liabilities are equivalent to approximately 70% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On Quanta Computer’s ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Quanta Computer looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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. 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. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
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