Today we'll look at Intuit Inc. (NASDAQ:INTU) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. 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.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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 Intuit:
0.43 = US$1.9b ÷ (US$6.3b - US$2.0b) (Based on the trailing twelve months to July 2019.)
So, Intuit has an ROCE of 43%.
Does Intuit Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Intuit's ROCE is meaningfully higher than the 10.0% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Intuit's ROCE in absolute terms currently looks quite high.
We can see that, Intuit currently has an ROCE of 43%, less than the 62% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Intuit's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Intuit's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Intuit has total assets of US$6.3b and current liabilities of US$2.0b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. A medium level of current liabilities boosts Intuit's ROCE somewhat.
What We Can Learn From Intuit's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Intuit 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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If you spot an error that warrants correction, please contact the editor at email@example.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.