Today we’ll look at Verint Systems Inc. (NASDAQ:VRNT) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Verint Systems:
0.05 = US$50m ÷ (US$2.7b – US$567m) (Based on the trailing twelve months to October 2018.)
So, Verint Systems has an ROCE of 5.0%.
Does Verint Systems Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Verint Systems’s ROCE appears to be significantly below the 9.5% average in 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 Verint Systems compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. Readers may wish to look for more rewarding investments.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Verint Systems.
What Are Current Liabilities, And How Do They Affect Verint Systems’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Verint Systems has total assets of US$2.7b and current liabilities of US$567m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
The Bottom Line On Verint Systems’s ROCE
While that is good to see, Verint Systems has a low ROCE and does not look attractive in this analysis. We prefer to see a high ROCE, but even a low quality business can be a good buy at the right price. Therefore, you will not want to miss this free chart depicting insider transactions
Of course Verint Systems may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.
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 email@example.com.