Stampscom Inc (NASDAQ:STMP): Why Return On Capital Employed Is Important

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Stampscom Inc (NASDAQ:STMP).

Stamps.com stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to STMP’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. To understand Stamps.com’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

See our latest analysis for Stamps.com

Calculating Return On Capital Employed for STMP

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Stamps.com’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. STMP’s ROCE is calculated below:

ROCE Calculation for STMP

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US$188m ÷ (US$844m – US$128m) = 26%

As you can see, STMP earned $26.3 from every $100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Stamps.com is currently able to return a fantastic amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.

NasdaqGS:STMP Last Perf November 9th 18
NasdaqGS:STMP Last Perf November 9th 18

A deeper look

The encouraging ROCE is good news for Stamps.com investors if the company is able to maintain strong earnings and control their capital needs. But if this doesn’t occur, STMP’s ROCE may deteriorate, in which case your money is better invested elsewhere. Because of this, it is important to look beyond the final value of STMP’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that STMP’s ROCE has risen from 17%, indicating the company’s capital returns have stengthened. With this, the current earnings of US$188m improved from US$40m and the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

ROCE for STMP investors has grown in the last few years and 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. It’s important to account for these factors because 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 STMP’s future growth? Take a look at our free research report of analyst consensus for STMP’s outlook.
  2. Valuation: What is STMP 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 STMP 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.