Yahoo Finance Is There More To CoStar Group, Inc. (NASDAQ:CSGP) Than Its 10% Returns On Capital?
Today we'll look at CoStar Group, Inc. (NASDAQ:CSGP) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 CoStar Group:
0.10 = US$367m ÷ (US$3.7b - US$198m) (Based on the trailing twelve months to September 2019.)
So, CoStar Group has an ROCE of 10%.
Check out our latest analysis for CoStar Group
Is CoStar Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that CoStar Group's ROCE is fairly close to the Professional Services industry average of 12%. Separate from how CoStar Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
We can see that, CoStar Group currently has an ROCE of 10% compared to its ROCE 3 years ago, which was 6.6%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how CoStar Group's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
CoStar Group's Current Liabilities And Their Impact On Its 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.
CoStar Group has total liabilities of US$198m and total assets of US$3.7b. As a result, its current liabilities are equal to approximately 5.3% of its total assets. CoStar Group has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On CoStar Group's ROCE
If performance improves, then CoStar Group may be an OK investment, especially at the right valuation. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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 editorial-team@simplywallst.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.
