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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. Last but not least, we’ll look at what impact its current liabilities have on 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. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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:
0.095 = €306k ÷ (€7.0m – €3.7m) (Based on the trailing twelve months to March 2019.)
Therefore, QPR Software Oyj has an ROCE of 9.5%.
Is QPR Software Oyj’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, QPR Software Oyj’s ROCE appears meaningfully below the 16% average reported by the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how QPR Software Oyj compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, QPR Software Oyj’s ROCE appears to be 9.5%, compared to 3 years ago, when its ROCE was 0.2%. This makes us think about whether the company has been reinvesting shrewdly.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 assets of €7.0m and current liabilities of €3.7m. Therefore its current liabilities are equivalent to approximately 54% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On QPR Software Oyj’s ROCE
While its ROCE looks decent, it wouldn’t look so good if it reduced current liabilities. QPR Software Oyj 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.