Stock Analysis

Here's What To Make Of CyberArk Software's (NASDAQ:CYBR) Returns On Capital

  •  Updated
NasdaqGS:CYBR
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at CyberArk Software (NASDAQ:CYBR) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for CyberArk Software, this is the formula:

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

0.0049 = US$6.5m ÷ (US$1.6b - US$247m) (Based on the trailing twelve months to December 2020).

So, CyberArk Software has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Software industry average of 11%.

See our latest analysis for CyberArk Software

roce
NasdaqGS:CYBR Return on Capital Employed March 5th 2021

Above you can see how the current ROCE for CyberArk Software compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CyberArk Software here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at CyberArk Software doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that CyberArk Software is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 273% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

CyberArk Software does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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What are the risks and opportunities for CyberArk Software?

CyberArk Software Ltd., together with its subsidiaries, develops, markets, and sales software-based security solutions and services in the United States, Europe, the Middle East, Africa, and internationally.

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Rewards

  • Revenue is forecast to grow 16.84% per year

Risks

  • Shareholders have been diluted in the past year

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