Today we'll look at CyberArk Software Ltd. (NASDAQ:CYBR) 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, 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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?
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 CyberArk Software:
0.10 = US$67m ÷ (US$828m - US$165m) (Based on the trailing twelve months to September 2019.)
So, CyberArk Software has an ROCE of 10%.
Is CyberArk Software's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see CyberArk Software's ROCE is around the 9.7% average reported by the Software industry. Regardless of where CyberArk Software sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how CyberArk Software's past growth compares to other companies.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CyberArk Software.
What Are Current Liabilities, And How Do They Affect CyberArk Software's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
CyberArk Software has current liabilities of US$165m and total assets of US$828m. As a result, its current liabilities are equal to approximately 20% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On CyberArk Software's ROCE
This is good to see, and with a sound ROCE, CyberArk Software could be worth a closer look. There might be better investments than CyberArk Software out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like CyberArk Software better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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