How Good Is Take-Two Interactive Software, Inc. (NASDAQ:TTWO) At Creating Shareholder Value?

Today we are going to look at Take-Two Interactive Software, Inc. (NASDAQ:TTWO) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the 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. 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 Take-Two Interactive Software:

0.087 = US$156m ÷ (US$3.7b - US$1.5b) (Based on the trailing twelve months to September 2018.)

So, Take-Two Interactive Software has an ROCE of 8.7%.

See our latest analysis for Take-Two Interactive Software

Is Take-Two Interactive Software's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Take-Two Interactive Software's ROCE is fairly close to the Entertainment industry average of 9.9%. Separate from how Take-Two Interactive Software stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Take-Two Interactive Software delivered an ROCE of 8.7%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for Take-Two Interactive Software.

Do Take-Two Interactive Software'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Take-Two Interactive Software has total assets of US$3.7b and current liabilities of US$1.5b. As a result, its current liabilities are equal to approximately 41% of its total assets. Take-Two Interactive Software has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From Take-Two Interactive Software's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course you might be able to find a better stock than Take-Two Interactive Software. So you may wish to see this freecollection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this freelist of growing companies that insiders are 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.