Today we are going to look at Stamps.com Inc. (NASDAQ:STMP) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Stamps.com:
0.16 = US$118m ÷ (US$864m - US$149m) (Based on the trailing twelve months to September 2019.)
Therefore, Stamps.com has an ROCE of 16%.
Does Stamps.com Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Stamps.com's ROCE is meaningfully better than the 7.2% average in the Online Retail industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Stamps.com sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Stamps.com's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Stamps.com.
Do Stamps.com's Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Stamps.com has total liabilities of US$149m and total assets of US$864m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Stamps.com's ROCE
With that in mind, Stamps.com's ROCE appears pretty good. There might be better investments than Stamps.com 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.
I will like Stamps.com better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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