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A Close Look At Cognex Corporation’s (NASDAQ:CGNX) 18% ROCE

Simply Wall St

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Today we are going to look at Cognex Corporation ( NASDAQ:CGNX ) to see whether it might be an attractive investment prospect. 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.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 Cognex:

0.18 = US$221m ÷ (US$1.3b - US$91m) (Based on the trailing twelve months to December 2018.)

So, Cognex has an ROCE of 18%.

Check out our latest analysis for Cognex

Is Cognex's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Cognex's ROCE is meaningfully higher than the 11% average in the Electronic 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. Separate from Cognex's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

NasdaqGS:CGNX Past Revenue and Net Income, April 9th 2019

It is important to remember that ROCE shows past performance, and is 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 Cognex .

Cognex's Current Liabilities And Their Impact On 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 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.

Cognex has total liabilities of US$91m and total assets of US$1.3b. As a result, its current liabilities are equal to approximately 7.1% of its total assets. Low current liabilities have only a minimal impact on Cognex's ROCE, making its decent returns more credible.

The Bottom Line On Cognex's ROCE

If it is able to keep this up, Cognex could be attractive. Of course you might be able to find a better stock than Cognex . So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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. Thank you for reading.