Today we are going to look at F5 Networks, Inc. (NASDAQ:FFIV) 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, 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.
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'.
So, How Do We Calculate ROCE?
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 F5 Networks:
0.18 = US$502m ÷ (US$3.9b - US$1.2b) (Based on the trailing twelve months to December 2019.)
Therefore, F5 Networks has an ROCE of 18%.
Is F5 Networks's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, F5 Networks's ROCE is meaningfully higher than the 6.1% average in the Communications 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 F5 Networks's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
F5 Networks's current ROCE of 18% is lower than 3 years ago, when the company reported a 38% ROCE. So investors might consider if it has had issues recently. The image below shows how F5 Networks's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do F5 Networks's Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.
F5 Networks has current liabilities of US$1.2b and total assets of US$3.9b. As a result, its current liabilities are equal to approximately 30% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On F5 Networks's ROCE
This is good to see, and with a sound ROCE, F5 Networks could be worth a closer look. There might be better investments than F5 Networks 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).
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