Today we’ll look at Euronet Worldwide, Inc. (NASDAQ:EEFT) 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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’.
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 Euronet Worldwide:
0.14 = US$403m ÷ (US$4.3b – US$1.5b) (Based on the trailing twelve months to June 2019.)
So, Euronet Worldwide has an ROCE of 14%.
Is Euronet Worldwide’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Euronet Worldwide’s ROCE is meaningfully better than the 9.9% average in the IT 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. Independently of how Euronet Worldwide compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Euronet Worldwide.
What Are Current Liabilities, And How Do They Affect Euronet Worldwide’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Euronet Worldwide has total assets of US$4.3b and current liabilities of US$1.5b. As a result, its current liabilities are equal to approximately 34% of its total assets. Euronet Worldwide has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Euronet Worldwide’s ROCE
Euronet Worldwide’s ROCE does look good, but the level of current liabilities also contribute to that. Euronet Worldwide looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.