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Why Bottomline Technologies (de), Inc.’s (NASDAQ:EPAY) Return On Capital Employed Might Be A Concern

Simply Wall St

Today we are going to look at Bottomline Technologies (de), Inc. (NASDAQ:EPAY) 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the 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?

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 Bottomline Technologies (de):

0.018 = US$9.5m ÷ (US$660m - US$128m) (Based on the trailing twelve months to March 2019.)

Therefore, Bottomline Technologies (de) has an ROCE of 1.8%.

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Does Bottomline Technologies (de) Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Bottomline Technologies (de)'s ROCE appears to be significantly below the 9.7% average in the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Bottomline Technologies (de) compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.

Bottomline Technologies (de) delivered an ROCE of 1.8%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.

NasdaqGS:EPAY Past Revenue and Net Income, May 23rd 2019

When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Bottomline Technologies (de)'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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Bottomline Technologies (de) has total assets of US$660m and current liabilities of US$128m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On Bottomline Technologies (de)'s ROCE

Bottomline Technologies (de) 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).

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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.