Why We’re Not Keen On OptimizeRx Corporation’s (NASDAQ:OPRX) 0.005% Return On Capital

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Today we'll evaluate OptimizeRx Corporation (NASDAQ:OPRX) 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.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.

So, How Do We Calculate ROCE?

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 OptimizeRx:

0.00005 = -US$2.1m ÷ (US$20m - US$2.6m) (Based on the trailing twelve months to September 2018.)

So, OptimizeRx has an ROCE of 0.005%.

Check out our latest analysis for OptimizeRx

Is OptimizeRx's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, OptimizeRx's ROCE appears meaningfully below the 8.1% average reported by the Healthcare Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside OptimizeRx's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

As we can see, OptimizeRx currently has an ROCE of 0.005%, less than the 0.3% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our freereport on analyst forecasts for OptimizeRx.

How OptimizeRx's Current Liabilities Impact 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.

OptimizeRx has total liabilities of US$2.6m and total assets of US$20m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On OptimizeRx's ROCE

That's not a bad thing, however OptimizeRx has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

I will like OptimizeRx better if I see some big insider buys. While we wait, check out this freelist of growing companies with considerable, recent, insider buying.

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.