Yahoo Finance Insignia Systems, Inc.’s (NASDAQ:ISIG) Investment Returns Are Lagging Its Industry
Today we’ll look at Insignia Systems, Inc. (NASDAQ:ISIG) 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.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Insignia Systems:
0.14 = -US$908.0k ÷ (US$24m – US$6.9m) (Based on the trailing twelve months to September 2018.)
So, Insignia Systems has an ROCE of 14%.
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Does Insignia Systems Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Insignia Systems’s ROCE is meaningfully higher than the 8.2% average in the Media industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Insignia Systems compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, Insignia Systems currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 3.4%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. If Insignia Systems is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Insignia Systems’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Insignia Systems has total assets of US$24m and current liabilities of US$6.9m. As a result, its current liabilities are equal to approximately 29% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Insignia Systems’s ROCE
This is good to see, and with a sound ROCE, Insignia Systems could be worth a closer look. Of course you might be able to find a better stock than Insignia Systems. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Insignia Systems better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
