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Today we’ll evaluate Verint Systems Inc. (NASDAQ:VRNT) 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from 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. 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?
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 Verint Systems:
0.054 = US$124m ÷ (US$3.0b – US$661m) (Based on the trailing twelve months to April 2019.)
Therefore, Verint Systems has an ROCE of 5.4%.
Is Verint Systems’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Verint Systems’s ROCE appears to be significantly below the 9.6% 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. Independently of how Verint Systems compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. It is likely that there are more attractive prospects out there.
In our analysis, Verint Systems’s ROCE appears to be 5.4%, compared to 3 years ago, when its ROCE was 2.8%. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Verint Systems’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Verint Systems has total liabilities of US$661m and total assets of US$3.0b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take 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. Of course, you might also be able to find a better stock than Verint Systems. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Verint Systems better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 firstname.lastname@example.org. 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.