How Do RealPage, Inc.’s (NASDAQ:RP) Returns Compare To Its Industry?
Today we'll evaluate RealPage, Inc. (NASDAQ:RP) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
How Do You Calculate Return On Capital Employed?
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 RealPage:
0.055 = US$84m ÷ (US$2.2b - US$661m) (Based on the trailing twelve months to June 2019.)
So, RealPage has an ROCE of 5.5%.
Check out our latest analysis for RealPage
Does RealPage Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, RealPage's ROCE appears to be significantly below the 9.8% average in the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how RealPage stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
You can click on the image below to see (in greater detail) how RealPage'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for RealPage.
How RealPage's Current Liabilities Impact 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
RealPage has total assets of US$2.2b and current liabilities of US$661m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, RealPage's ROCE is concerning.
Our Take On RealPage's ROCE
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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.
