Looking Into Adobe's Return On Capital Employed

Adobe ADBE posted Q2 earnings of $1.41 billion, an increase from Q1 of 3.3%. Sales dropped to $3.83 billion, a 1.79% decrease between quarters. In Q1, Adobe earned $1.45 billion, and total sales reached $3.90 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, Adobe posted an ROCE of 0.1%.

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 an important metric for the comparison of similar companies. A relatively high ROCE shows Adobe 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 earnings per share growth.

For Adobe, the return on capital employed ratio shows the number of assets can actually help the company achieve higher returns, an important note investors will take into account when gauging the payoff from long-term financing strategies.

Q2 Earnings Insight

Adobe reported Q2 earnings per share at $3.03/share, which beat analyst predictions of $2.81/share.