Today we'll evaluate Logitech International S.A. (VTX:LOGN) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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?
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 Logitech International:
0.21 = US$285m ÷ (US$2.1b - US$733m) (Based on the trailing twelve months to June 2019.)
Therefore, Logitech International has an ROCE of 21%.
Check out our latest analysis for Logitech International
Is Logitech International's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Logitech International's ROCE appears to be substantially greater than the 11% average in the Tech industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Logitech International's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Logitech International's ROCE appears to be 21%, compared to 3 years ago, when its ROCE was 16%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Logitech International's ROCE compares to its industry. Click to see more on past growth.
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. 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.