This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Intuit Inc (NASDAQ:INTU)’s return fundamentals and stock market performance.
Buying Intuit makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to INTU’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Thus, to understand how your money can grow by investing in Intuit, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Calculating Return On Capital Employed for INTU
Choosing to invest in Intuit comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Intuit is good at growing investor capital. INTU’s ROCE is calculated below:
ROCE Calculation for INTU
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.50b ÷ (US$5.18b – US$2.12b) = 49.1%
As you can see, INTU earned $49.1 from every $100 you invested over the previous twelve months. This makes Intuit exceptionally profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a rapid rate over time.
Can any of this change?
Intuit’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Intuit is in a favourable position, but this can change if these factors underperform. Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Intuit will continue the solid returns. Looking at the past 3 year period shows us that INTU boosted investor return on capital employed from 26.8%. With this, the current earnings of US$1.50b improved from US$860.0m and capital employed has declined in response to a larger reliance on current liabilities (more borrowed money) , which is an indication that Intuit has increased the ROCE for investors by producing more earnings and using less capital.
INTU’s investors have enjoyed an upward trend in ROCE and it is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. As an investor this is the type of situation you look for, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for INTU’s future growth? Take a look at our free research report of analyst consensus for INTU’s outlook.
- Valuation: What is INTU worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether INTU is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org.