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We're Watching These Trends At Shutterstock (NYSE:SSTK)

·3 min read

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Shutterstock (NYSE:SSTK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Shutterstock is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.059 = US$23m ÷ (US$615m - US$232m) (Based on the trailing twelve months to March 2020).

Thus, Shutterstock has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Online Retail industry average of 7.3%.

See our latest analysis for Shutterstock

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In the above chart we have a measured Shutterstock's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at Shutterstock doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.9% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Shutterstock's ROCE

Bringing it all together, while we're somewhat encouraged by Shutterstock's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 9.0% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shutterstock has the makings of a multi-bagger.

Shutterstock does have some risks though, and we've spotted 1 warning sign for Shutterstock that you might be interested in.

While Shutterstock isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.