Why Euronet Worldwide, Inc.’s (NASDAQ:EEFT) Return On Capital Employed Is Impressive
Today we are going to look at Euronet Worldwide, Inc. (NASDAQ:EEFT) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
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 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?
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 Euronet Worldwide:
0.17 = US$451m ÷ (US$4.2b - US$1.5b) (Based on the trailing twelve months to March 2020.)
So, Euronet Worldwide has an ROCE of 17%.
View our latest analysis for Euronet Worldwide
Does Euronet Worldwide Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Euronet Worldwide's ROCE is meaningfully higher than the 9.9% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Euronet Worldwide sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
The image below shows how Euronet Worldwide's ROCE compares to its industry, and you can click it to see more detail on its 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. 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 Euronet Worldwide.
Do Euronet Worldwide's Current Liabilities Skew 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Euronet Worldwide has current liabilities of US$1.5b and total assets of US$4.2b. Therefore its current liabilities are equivalent to approximately 35% of its total assets. Euronet Worldwide has a medium level of current liabilities, which would boost the ROCE.
Our Take On Euronet Worldwide's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Euronet Worldwide out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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. Thank you for reading.
