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Today we are going to look at Fortinet, Inc. (NASDAQ:FTNT) 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.
First of all, we'll work out how to 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. 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.'
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 Fortinet:
0.13 = US$249m ÷ (US$3.2b - US$1.3b) (Based on the trailing twelve months to March 2019.)
Therefore, Fortinet has an ROCE of 13%.
View our latest analysis for Fortinet
Does Fortinet Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Fortinet's ROCE is meaningfully better than the 9.5% average in the Software 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. Independently of how Fortinet compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Fortinet's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 1.8%. This makes us think the business might be improving. You can see in the image below how Fortinet's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.