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A Close Look At Maxim Integrated Products, Inc.’s (NASDAQ:MXIM) 20% ROCE

Today we'll evaluate Maxim Integrated Products, Inc. (NASDAQ:MXIM) 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. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?

The formula for calculating the return on capital employed is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Maxim Integrated Products:

0.20 = US$663m ÷ (US$3.6b - US$360m) (Based on the trailing twelve months to December 2019.)

Therefore, Maxim Integrated Products has an ROCE of 20%.

View our latest analysis for Maxim Integrated Products

Is Maxim Integrated Products's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Maxim Integrated Products's ROCE appears to be substantially greater than the 9.5% average in the Semiconductor industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Maxim Integrated Products's ROCE currently appears to be excellent.

You can click on the image below to see (in greater detail) how Maxim Integrated Products's past growth compares to other companies.

NasdaqGS:MXIM Past Revenue and Net Income, March 10th 2020
NasdaqGS:MXIM Past Revenue and Net Income, March 10th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Maxim Integrated Products's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Maxim Integrated Products has total assets of US$3.6b and current liabilities of US$360m. Therefore its current liabilities are equivalent to approximately 9.9% of its total assets. Maxim Integrated Products has low current liabilities, which have a negligible impact on its relatively good ROCE.

What We Can Learn From Maxim Integrated Products's ROCE

This suggests the company would be worth researching in more depth. There might be better investments than Maxim Integrated Products out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Maxim Integrated Products 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.