What We Think Of IEC Electronics Corp.’s (NYSEMKT:IEC) Investment Potential

Today we’ll evaluate IEC Electronics Corp. (NYSEMKT:IEC) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, 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 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. Author Edwin Whitingsaysto be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike. 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 IEC Electronics:

0.11 = US$7.6m ÷ (US$111m – US$42m) (Based on the trailing twelve months to September 2019.)

So, IEC Electronics has an ROCE of 11%.

See our latest analysis for IEC Electronics Does IEC Electronics Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that IEC Electronics’s ROCE is fairly close to the Electronic industry average of 12%. Independently of how IEC Electronics compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

IEC Electronics’s current ROCE of 11% is lower than its ROCE in the past, which was 20%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how IEC Electronics’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, 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 IEC Electronics. What Are Current Liabilities, And How Do They Affect IEC Electronics’s ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

IEC Electronics has total liabilities of US$42m and total assets of US$111m. As a result, its current liabilities are equal to approximately 38% of its total assets. IEC Electronics has a medium level of current liabilities, which would boost the ROCE. What We Can Learn From IEC Electronics’s ROCE

IEC Electronics’s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than IEC Electronics 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.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor ateditorial-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.

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