Yahoo Finance CONMED Corporation’s (NASDAQ:CNMD) Investment Returns Are Lagging Its Industry
Today we'll evaluate CONMED Corporation (NASDAQ:CNMD) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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 CONMED:
0.05 = US$79m ÷ (US$1.8b - US$161m) (Based on the trailing twelve months to December 2019.)
So, CONMED has an ROCE of 5.0%.
View our latest analysis for CONMED
Does CONMED Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, CONMED's ROCE appears meaningfully below the 9.0% average reported by the Medical Equipment industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, CONMED's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
You can click on the image below to see (in greater detail) how CONMED's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CONMED.
How CONMED'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
CONMED has total assets of US$1.8b and current liabilities of US$161m. As a result, its current liabilities are equal to approximately 9.1% of its total assets. CONMED reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On CONMED's ROCE
CONMED looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than CONMED. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like CONMED 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.
