Is CyberArk Software Ltd.’s (NASDAQ:CYBR) Capital Allocation Ability Worth Your Time?

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Today we are going to look at CyberArk Software Ltd. (NASDAQ:CYBR) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?

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 CyberArk Software:

0.096 = US$57m ÷ (US$749m – US$153m) (Based on the trailing twelve months to March 2019.)

So, CyberArk Software has an ROCE of 9.6%.

See our latest analysis for CyberArk Software

Does CyberArk Software Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, CyberArk Software’s ROCE appears to be around the 9.5% average of the Software industry. Separate from how CyberArk 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.

NasdaqGS:CYBR Past Revenue and Net Income, July 4th 2019
NasdaqGS:CYBR Past Revenue and Net Income, July 4th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for CyberArk Software.

What Are Current Liabilities, And How Do They Affect CyberArk Software’s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

CyberArk Software has total liabilities of US$153m and total assets of US$749m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On CyberArk Software’s ROCE

That said, CyberArk Software’s ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like CyberArk Software better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.