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Today we'll evaluate Citrix Systems, Inc. (NASDAQ:CTXS) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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'.
How Do You Calculate Return On Capital Employed?
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 Citrix Systems:
0.28 = US$649m ÷ (US$5.2b - US$2.8b) (Based on the trailing twelve months to March 2019.)
So, Citrix Systems has an ROCE of 28%.
View our latest analysis for Citrix Systems
Is Citrix Systems's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Citrix Systems's ROCE is meaningfully better than the 9.0% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Citrix Systems's ROCE in absolute terms currently looks quite high.
In our analysis, Citrix Systems's ROCE appears to be 28%, compared to 3 years ago, when its ROCE was 16%. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for Citrix Systems.
How Citrix Systems'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Citrix Systems has total assets of US$5.2b and current liabilities of US$2.8b. As a result, its current liabilities are equal to approximately 55% of its total assets. Citrix Systems's high level of current liabilities boost the ROCE - but its ROCE is still impressive.
The Bottom Line On Citrix Systems's ROCE
So to us, the company is potentially worth investigating further. Citrix Systems 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.
If you like to buy stocks alongside management, then you might just love this freelist of companies. (Hint: insiders have been buying them).
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 editorial-team@simplywallst.com. 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.