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A Close Look At CynergisTek, Inc.’s (NYSEMKT:CTEK) 15% ROCE

Simply Wall St

Today we'll look at CynergisTek, Inc. (NYSEMKT:CTEK) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 CynergisTek:

0.15 = US$5.8m ÷ (US$47m - US$8.3m) (Based on the trailing twelve months to June 2019.)

So, CynergisTek has an ROCE of 15%.

View our latest analysis for CynergisTek

Is CynergisTek's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. CynergisTek's ROCE appears to be substantially greater than the 11% average in the Healthcare industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where CynergisTek sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, CynergisTek currently has an ROCE of 15%, less than the 22% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how CynergisTek's past growth compares to other companies.

AMEX:CTEK Past Revenue and Net Income, October 25th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 CynergisTek.

CynergisTek'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

CynergisTek has total assets of US$47m and current liabilities of US$8.3m. Therefore its current liabilities are equivalent to approximately 18% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

What We Can Learn From CynergisTek's ROCE

Overall, CynergisTek has a decent ROCE and could be worthy of further research. There might be better investments than CynergisTek 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.

CynergisTek is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.