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How Do QuinStreet, Inc.’s (NASDAQ:QNST) Returns On Capital Compare To Peers?

Simply Wall St

Today we'll look at QuinStreet, Inc. (NASDAQ:QNST) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.'

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 QuinStreet:

0.049 = US$11m ÷ (US$298m - US$75m) (Based on the trailing twelve months to March 2019.)

Therefore, QuinStreet has an ROCE of 4.9%.

View our latest analysis for QuinStreet

Does QuinStreet Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, QuinStreet's ROCE appears to be significantly below the 9.2% average in the Interactive Media and Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how QuinStreet stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

QuinStreet has an ROCE of 4.9%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how QuinStreet's past growth compares to other companies.

NasdaqGS:QNST Past Revenue and Net Income, August 6th 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for QuinStreet.

How QuinStreet's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

QuinStreet has total assets of US$298m and current liabilities of US$75m. Therefore its current liabilities are equivalent to approximately 25% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On QuinStreet's ROCE

QuinStreet has a poor ROCE, and there may be better investment prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like QuinStreet better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.