Yahoo Finance Does Gentherm Incorporated (NASDAQ:THRM) Create Value For Shareholders?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Today we’ll evaluate Gentherm Incorporated (NASDAQ:THRM) 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.
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. All else being equal, a better business will have a higher ROCE. 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’.
So, How Do We Calculate ROCE?
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 Gentherm:
0.13 = US$98m ÷ (US$845m – US$178m) (Based on the trailing twelve months to September 2018.)
So, Gentherm has an ROCE of 13%.
Check out our latest analysis for Gentherm
Does Gentherm Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Gentherm’s ROCE appears to be around the 15% average of the Auto Components industry. Regardless of where Gentherm sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Gentherm’s current ROCE of 13% is lower than its ROCE in the past, which was 24%, 3 years ago. So investors might consider if it has had issues recently.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Gentherm.
How Gentherm’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Gentherm has total liabilities of US$178m and total assets of US$845m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Gentherm’s ROCE
Overall, Gentherm has a decent ROCE and could be worthy of further research. You might be able to find a better buy than Gentherm. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Gentherm better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. On rare occasion, data errors may occur. Thank you for reading.
