Absolute Software Corporation (TSE:ABT): A Look At Return On Capital

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Absolute Software Corporation (TSE:ABT).

Purchasing Absolute Software gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to ABT’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Absolute Software is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

See our latest analysis for Absolute Software

Calculating Return On Capital Employed for ABT

Choosing to invest in Absolute Software comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Absolute Software’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. ABT’s ROCE is calculated below:

The calculation above shows that ABT’s earnings were 39% of capital employed. This shows Absolute Software provides a great return on capital employed that is well above the 15% ROCE that is typically considered to be a strong benchmark. As a result, if ABT is clever with their reinvestments or dividend payments, investors can grow their capital at an enviable rate over time.

Not so fast

Although Absolute Software is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Absolute Software will continue the solid returns. Looking three years in the past, it is evident that ABT's ROCE has risen from 16%, indicating the company's capital returns have stengthened. With this, the current earnings of US$3m actually declined from US$8m but the use of capital has fallen further due to a decreased level of total assets employed , which suggests investor's ROCE has risen because the company requires less capital to create earnings despite the previous decline in EBT.

Next Steps

ABT's investors have enjoyed an upward trend in ROCE and it is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.

1. Future Outlook: What are well-informed industry analysts predicting for ABT’s future growth? Take a look at our free research report of analyst consensus for ABT’s outlook.
2. Valuation: What is ABT worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ABT is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.