Why Bottomline Technologies (de), Inc.’s (NASDAQ:EPAY) Return On Capital Employed Looks Uninspiring

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Today we are going to look at Bottomline Technologies (de), Inc. (NASDAQ:EPAY) to see whether it might be an attractive investment prospect. 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.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Bottomline Technologies (de):

0.014 = US$8.0m ÷ (US$618m – US$103m) (Based on the trailing twelve months to December 2018.)

So, Bottomline Technologies (de) has an ROCE of 1.4%.

View our latest analysis for Bottomline Technologies (de)

Is Bottomline Technologies (de)’s ROCE Good?

One way to assess ROCE is to compare similar companies. In this analysis, Bottomline Technologies (de)’s ROCE appears meaningfully below the 9.4% average reported by the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Bottomline Technologies (de) compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. There are potentially more appealing investments elsewhere.

Bottomline Technologies (de) delivered an ROCE of 1.4%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.

NASDAQGS:EPAY Last Perf February 12th 19
NASDAQGS:EPAY Last Perf February 12th 19

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bottomline Technologies (de).

Bottomline Technologies (de)’s Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Bottomline Technologies (de) has total assets of US$618m and current liabilities of US$103m. As a result, its current liabilities are equal to approximately 17% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On Bottomline Technologies (de)’s ROCE

While that is good to see, Bottomline Technologies (de) has a low ROCE and does not look attractive in this analysis. But note: Bottomline Technologies (de) may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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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.