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Is OptimizeRx Corporation's (NASDAQ:OPRX) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at OptimizeRx Corporation (NASDAQ:OPRX) to see whether it might be an attractive investment prospect. 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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 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 OptimizeRx:

0.058 = US$1.2m ÷ (US$25m - US$3.9m) (Based on the trailing twelve months to March 2019.)

So, OptimizeRx has an ROCE of 5.8%.

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Does OptimizeRx Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, OptimizeRx's ROCE appears to be around the 7.0% average of the Healthcare Services industry. Setting aside the industry comparison for now, OptimizeRx's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

OptimizeRx delivered an ROCE of 5.8%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.

NasdaqCM:OPRX Past Revenue and Net Income, May 17th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for OptimizeRx.

How OptimizeRx's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

OptimizeRx has total liabilities of US$3.9m and total assets of US$25m. As a result, its current liabilities are equal to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On OptimizeRx's ROCE

With that in mind, we're not overly impressed with OptimizeRx's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than OptimizeRx. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.