Today we’ll evaluate SilverSun Technologies, Inc. (NASDAQ:SSNT) 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, 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 SilverSun Technologies:
0.075 = US$464k ÷ (US$12m – US$6.2m) (Based on the trailing twelve months to March 2019.)
So, SilverSun Technologies has an ROCE of 7.5%.
Does SilverSun Technologies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see SilverSun Technologies’s ROCE is meaningfully below the Software industry average of 9.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, SilverSun Technologies’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.
SilverSun Technologies reported an ROCE of 7.5% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.
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. ROCE is only a point-in-time measure. You can check if SilverSun Technologies has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do SilverSun Technologies’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
SilverSun Technologies has total assets of US$12m and current liabilities of US$6.2m. As a result, its current liabilities are equal to approximately 50% of its total assets. SilverSun Technologies’s middling level of current liabilities have the effect of boosting its ROCE a bit.
What We Can Learn From SilverSun Technologies’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 email@example.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.