Yahoo Finance Should You Like Abiomed, Inc.’s (NASDAQ:ABMD) High Return On Capital Employed?
Today we'll look at Abiomed, Inc. (NASDAQ:ABMD) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 Abiomed:
0.25 = US$248m ÷ (US$1.1b - US$112m) (Based on the trailing twelve months to September 2019.)
Therefore, Abiomed has an ROCE of 25%.
View our latest analysis for Abiomed
Does Abiomed Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Abiomed's ROCE is meaningfully higher than the 8.9% average in the Medical Equipment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Abiomed's ROCE is currently very good.
Our data shows that Abiomed currently has an ROCE of 25%, compared to its ROCE of 17% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Abiomed'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. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Abiomed.
Do Abiomed's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Abiomed has total assets of US$1.1b and current liabilities of US$112m. As a result, its current liabilities are equal to approximately 10.0% of its total assets. Abiomed has low current liabilities, which have a negligible impact on its relatively good ROCE.
What We Can Learn From Abiomed's ROCE
This should mark the company as worthy of further investigation. Abiomed 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.
I will like Abiomed better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
