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Examining Roper Technologies, Inc.’s (NYSE:ROP) Weak Return On Capital Employed

Simply Wall St

Today we are going to look at Roper Technologies, Inc. (NYSE:ROP) 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.

Firstly, we'll go over how we 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. All else being equal, a better business will have a higher ROCE. 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 Roper Technologies:

0.095 = US$1.5b ÷ (US$18b - US$2.4b) (Based on the trailing twelve months to December 2019.)

Therefore, Roper Technologies has an ROCE of 9.5%.

Check out our latest analysis for Roper Technologies

Is Roper Technologies's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Roper Technologies's ROCE appears to be significantly below the 14% average in the Industrials industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Roper Technologies's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

The image below shows how Roper Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:ROP Past Revenue and Net Income March 30th 2020

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. 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 Roper Technologies.

Do Roper Technologies's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Roper Technologies has current liabilities of US$2.4b and total assets of US$18b. As a result, its current liabilities are equal to approximately 13% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Roper Technologies's ROCE

That said, Roper Technologies's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Roper Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.