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Return On Capital Employed Overview: Twitter


Twitter (NYSE:TWTR) posted a 120.48% decrease in earnings from Q2. Sales, however, increased by 36.99% over the previous quarter to $936.23 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Twitter is not utilizing their capital as effectively as possible. Twitter collected $683.44 million in revenue during Q2, but reported earnings showed a $273.93 million loss.

Why ROCE Is Significant

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, Twitter posted an ROCE of 0.01%.

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 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 earnings per share growth.

For Twitter, 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.

Q3 Earnings Insight

Twitter reported Q3 earnings per share at $0.19/share, which beat analyst predictions of $0.06/share.


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