Why We’re Not Keen On ACI Worldwide, Inc.’s (NASDAQ:ACIW) 6.9% Return On Capital

Today we'll evaluate ACI Worldwide, Inc. (NASDAQ:ACIW) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for ACI Worldwide:

0.069 = US$134m ÷ (US$2.0b - US$250m) (Based on the trailing twelve months to September 2018.)

Therefore, ACI Worldwide has an ROCE of 6.9%.

View our latest analysis for ACI Worldwide

Is ACI Worldwide's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see ACI Worldwide's ROCE is meaningfully below the Software industry average of 9.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, ACI Worldwide's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

ACI Worldwide's current ROCE of 6.9% is lower than 3 years ago, when the company reported a 11% ROCE. This makes us wonder if the business is facing new challenges.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can see analyst predictions in our freereport on analyst forecasts for the company.

How ACI Worldwide's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

ACI Worldwide has total liabilities of US$250m and total assets of US$2.0b. Therefore its current liabilities are equivalent to approximately 13% of its total assets.

Our Take On ACI Worldwide's ROCE

It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE. However, if ACI Worldwide continues to earn an uninspiring ROCE, there may be better places to invest. While the ROCE is useful information, it is not always predictive. We need to do more work before making a decision. For example, I often check if insiders have been buying shares .

Of course ACI Worldwide may not be the best stock to buy. So you may wish to see this free collection of other companies that have 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.

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.