eGain Corporation (NASDAQ:EGAN) Earns A Nice Return On Capital Employed
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Today we are going to look at eGain Corporation (NASDAQ:EGAN) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 eGain:
0.13 = US$3.9m ÷ (US$68m - US$38m) (Based on the trailing twelve months to March 2019.)
So, eGain has an ROCE of 13%.
See our latest analysis for eGain
Does eGain Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, eGain's ROCE is meaningfully higher than the 9.5% 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. Separate from eGain's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
eGain has an ROCE of 13%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for eGain.
eGain'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 counter this, investors can check if a company has high current liabilities relative to total assets.
eGain has total liabilities of US$38m and total assets of US$68m. As a result, its current liabilities are equal to approximately 57% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
What We Can Learn From eGain's ROCE
While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. eGain looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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.
