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Are Aspen Technology, Inc.’s (NASDAQ:AZPN) High Returns Really That Great?

Simply Wall St

Today we are going to look at Aspen Technology, Inc. (NASDAQ:AZPN) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. Overall, it is a valuable metric that has its flaws. 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'.

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 Aspen Technology:

0.49 = US$294m ÷ (US$1.0b - US$417m) (Based on the trailing twelve months to September 2019.)

So, Aspen Technology has an ROCE of 49%.

Check out our latest analysis for Aspen Technology

Does Aspen Technology Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Aspen Technology's ROCE appears to be substantially greater than the 9.8% average in the Software industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Aspen Technology's ROCE currently appears to be excellent.

You can see in the image below how Aspen Technology's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:AZPN Past Revenue and Net Income, December 1st 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Aspen Technology.

What Are Current Liabilities, And How Do They Affect Aspen Technology's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Aspen Technology has total assets of US$1.0b and current liabilities of US$417m. As a result, its current liabilities are equal to approximately 41% of its total assets. Aspen Technology has a medium level of current liabilities, boosting its ROCE somewhat.

Our Take On Aspen Technology's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than Aspen Technology 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.