Netflix (NASDAQ: NFLX) posted a 3.17% decrease in earnings from Q2. Sales, however, increased by 4.68% over the previous quarter to $6.44 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Netflix is not utilizing their capital as effectively as possible. In Q2, Netflix earned $1.36 billion and total sales reached $6.15 billion.
What Is Return On Capital Employed?
Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company’s ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q3, Netflix posted an ROCE of 0.13%.
Keep in mind, while ROCE is a good measure of a company’s recent performance, it is not a highly reliable predictor of a company’s earnings or sales in the near future.
Return on Capital Employed is an important measurement of efficiency and a useful tool when comparing companies that operate in the same industry. A relatively high ROCE indicates a company may be generating profits that can be reinvested into more capital, leading to higher returns and growing EPS for shareholders.
In Netflix’s case, the positive ROCE ratio will be something investors pay attention to before making long-term financial decisions.
Q3 Earnings Insight
Netflix reported Q3 earnings per share at $1.74/share, which did not meet analyst predictions of $2.13/share.
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