In This Article:
Today we'll look at Amkor Technology, Inc. (NASDAQ:AMKR) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Amkor Technology:
0.063 = US$207m ÷ (US$4.3b - US$1.0b) (Based on the trailing twelve months to June 2019.)
So, Amkor Technology has an ROCE of 6.3%.
Check out our latest analysis for Amkor Technology
Does Amkor Technology Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Amkor Technology's ROCE is meaningfully below the Semiconductor industry average of 10%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Amkor Technology stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
We can see that, Amkor Technology currently has an ROCE of 6.3% compared to its ROCE 3 years ago, which was 4.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Amkor Technology's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Amkor Technology.