In This Article:
Today we'll evaluate NETGEAR, Inc. (NASDAQ:NTGR) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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 NETGEAR:
0.081 = US$55m ÷ (US$993m - US$315m) (Based on the trailing twelve months to June 2019.)
So, NETGEAR has an ROCE of 8.1%.
View our latest analysis for NETGEAR
Is NETGEAR's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that NETGEAR's ROCE is meaningfully better than the 6.6% average in the Communications industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Aside from the industry comparison, NETGEAR's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that, NETGEAR currently has an ROCE of 8.1%, less than the 15% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how NETGEAR's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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.