What Should You Know About Qualys Inc's (NASDAQ:QLYS) Capital Returns?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in Qualys Inc (NASDAQ:QLYS).

Purchasing Qualys gives you an ownership stake in 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. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Qualys is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

See our latest analysis for Qualys

What is Return on Capital Employed (ROCE)?

Choosing to invest in Qualys comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business' ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. 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 Qualys is good at growing investor capital. Take a look at the formula box beneath:

The calculation above shows that QLYS’s earnings were 10.75% of capital employed. Comparing this to a healthy 15% benchmark shows Qualys is currently unable to return a desired amount to owners for the use of their capital, which isn't favourable for investors who have forgone other potentially solid companies.

What is causing this?

Qualys's relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Qualys is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of QLYS’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that QLYS boosted investor return on capital employed from 8.46%. Similarly, the movement in the earnings variable shows a jump from US$14.63m to US$42.41m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

ROCE for QLYS investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don't forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn't made apparent by looking at past data. 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.

1. Future Outlook: What are well-informed industry analysts predicting for QLYS’s future growth? Take a look at our free research report of analyst consensus for QLYS’s outlook.
2. Valuation: What is QLYS worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether QLYS is currently undervalued by the market.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.