Today we’ll look at TechTarget, Inc. (NASDAQ:TTGT) 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 of all, we’ll work out how to 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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’.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for TechTarget:
0.11 = US$23m ÷ (US$222m – US$16m) (Based on the trailing twelve months to December 2019.)
So, TechTarget has an ROCE of 11%.
Does TechTarget Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that TechTarget’s ROCE is meaningfully better than the 8.7% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from TechTarget’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, TechTarget currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 4.5%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how TechTarget’s past growth compares to other companies.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 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 TechTarget.
Do TechTarget’s Current Liabilities Skew Its 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.
TechTarget has total assets of US$222m and current liabilities of US$16m. As a result, its current liabilities are equal to approximately 7.4% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), TechTarget earns a sound return on capital employed.
What We Can Learn From TechTarget’s ROCE
If it is able to keep this up, TechTarget could be attractive. TechTarget shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like TechTarget better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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