Here’s why Support.com, Inc.’s (NASDAQ:SPRT) Returns On Capital Matters So Much

Today we'll evaluate Support.com, Inc. (NASDAQ:SPRT) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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'.

How Do You Calculate Return On Capital Employed?

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 Support.com:

0.061 = US$3.2m ÷ (US$57m - US$4.5m) (Based on the trailing twelve months to September 2019.)

Therefore, Support.com has an ROCE of 6.1%.

See our latest analysis for Support.com

Does Support.com Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Support.com's ROCE appears to be significantly below the 9.8% average in the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Support.com's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Support.com reported an ROCE of 6.1% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. The image below shows how Support.com's ROCE compares to its industry.

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. How cyclical is Support.com? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Support.com's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Support.com has total assets of US$57m and current liabilities of US$4.5m. Therefore its current liabilities are equivalent to approximately 7.8% of its total assets. With low levels of current liabilities, at least Support.com's mediocre ROCE is not unduly boosted.

The Bottom Line On Support.com's ROCE

Based on this information, Support.com appears to be a mediocre business. Of course, you might also be able to find a better stock than Support.com. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.