Alarm.com Holdings (NASDAQ:ALRM) Will Be Hoping To Turn Its Returns On Capital Around
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Alarm.com Holdings (NASDAQ:ALRM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Alarm.com Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$66m ÷ (US$1.4b - US$172m) (Based on the trailing twelve months to September 2023).
Therefore, Alarm.com Holdings has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.6%.
Check out our latest analysis for Alarm.com Holdings
Above you can see how the current ROCE for Alarm.com Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alarm.com Holdings.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Alarm.com Holdings doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 5.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On Alarm.com Holdings' ROCE
To conclude, we've found that Alarm.com Holdings is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 1.2% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Alarm.com Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Alarm.com Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
