Why QuinStreet, Inc.’s (NASDAQ:QNST) Return On Capital Employed Looks Uninspiring
Today we'll evaluate QuinStreet, Inc. (NASDAQ:QNST) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 QuinStreet:
0.062 = US$16m ÷ (US$342m - US$88m) (Based on the trailing twelve months to September 2019.)
Therefore, QuinStreet has an ROCE of 6.2%.
View our latest analysis for QuinStreet
Is QuinStreet's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, QuinStreet's ROCE appears meaningfully below the 9.0% average reported by the Interactive Media and Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how QuinStreet stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
QuinStreet delivered an ROCE of 6.2%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how QuinStreet'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 QuinStreet.
QuinStreet's Current Liabilities And Their Impact On 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
QuinStreet has current liabilities of US$88m and total assets of US$342m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On QuinStreet's ROCE
That said, QuinStreet's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than QuinStreet. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like QuinStreet better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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