Today we'll evaluate Blackbaud, Inc. ( NASDAQ:BLKB ) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. 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?
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 Blackbaud:
0.052 = US$57m ÷ (US$1.7b - US$601m) (Based on the trailing twelve months to March 2019.)
So, Blackbaud has an ROCE of 5.2%.
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Does Blackbaud Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Blackbaud's ROCE is meaningfully below the Software industry average of 9.7%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Blackbaud stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Blackbaud's current ROCE of 5.2% is lower than its ROCE in the past, which was 8.2%, 3 years ago. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Blackbaud .
How Blackbaud's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Blackbaud has total liabilities of US$601m and total assets of US$1.7b. Therefore its current liabilities are equivalent to approximately 35% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Blackbaud's low ROCE is unappealing.
What We Can Learn From Blackbaud's ROCE
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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.