Today we’ll evaluate QPR Software Oyj (HEL:QPR1V) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. In brief, ROCE 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 QPR Software Oyj:
0.17 = €433k ÷ (€5.5m – €2.6m) (Based on the trailing twelve months to September 2018.)
So, QPR Software Oyj has an ROCE of 17%.
See our latest analysis for QPR Software Oyj
Does QPR Software Oyj Have A Good ROCE?
One way to assess ROCE is to compare similar companies. QPR Software Oyj’s ROCE appears to be substantially greater than the 12% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from QPR Software Oyj’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
QPR Software Oyj’s current ROCE of 17% is lower than its ROCE in the past, which was 25%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is QPR Software Oyj? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do QPR Software Oyj’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
QPR Software Oyj has total liabilities of €2.6m and total assets of €5.5m. As a result, its current liabilities are equal to approximately 48% of its total assets. QPR Software Oyj has a medium level of current liabilities, which would boost the ROCE.
Our Take On QPR Software Oyj’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. You might be able to find a better buy than QPR Software Oyj. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
But note: QPR Software Oyj may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.
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.