Today we are going to look at Citrix Systems, Inc. (NASDAQ:CTXS) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Citrix Systems:
0.27 = US$617m ÷ (US$3.9b - US$1.7b) (Based on the trailing twelve months to June 2019.)
Therefore, Citrix Systems has an ROCE of 27%.
Is Citrix Systems's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Citrix Systems's ROCE is meaningfully higher than the 9.7% average in the Software industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Citrix Systems's ROCE is currently very good.
In our analysis, Citrix Systems's ROCE appears to be 27%, compared to 3 years ago, when its ROCE was 16%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Citrix Systems's past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Citrix Systems.
Citrix Systems's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Citrix Systems has total liabilities of US$1.7b and total assets of US$3.9b. As a result, its current liabilities are equal to approximately 43% of its total assets. A medium level of current liabilities boosts Citrix Systems's ROCE somewhat.
Our Take On Citrix Systems's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Citrix Systems shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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 firstname.lastname@example.org. 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.