Today we'll look at Blackbaud, Inc. (NASDAQ:BLKB) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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.
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 Blackbaud:
0.045 = US$47m ÷ (US$1.7b - US$677m) (Based on the trailing twelve months to September 2019.)
So, Blackbaud has an ROCE of 4.5%.
Does Blackbaud Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Blackbaud's ROCE appears meaningfully below the 9.9% average reported by the Software industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Blackbaud 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.
We can see that, Blackbaud currently has an ROCE of 4.5%, less than the 8.2% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Blackbaud's ROCE compares to its industry. Click to see more on past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Blackbaud.
Do Blackbaud's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Blackbaud has total liabilities of US$677m and total assets of US$1.7b. As a result, its current liabilities are equal to approximately 40% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Blackbaud's ROCE is concerning.
What We Can Learn From Blackbaud's ROCE
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.