According to Benzinga Pro data Twitter (NYSE:TWTR) posted a 42.03% decrease in earnings from Q1. Sales, however, increased by 14.86% over the previous quarter to $1.19 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Twitter is not utilizing their capital as effectively as possible. In Q1, Twitter earned $52.18 million and total sales reached $1.04 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 Q2, Twitter posted an ROCE of 0.0%.
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.
ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows Twitter is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.
For Twitter, the positive return on capital employed ratio of 0.0% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.
Upcoming Earnings Estimate
Twitter reported Q2 earnings per share at $0.2/share, which beat analyst predictions of $0.07/share.
