Looking Into Pinterest's Return On Capital Employed

Pinterest PINS posted a 311.42% decrease in earnings from Q3. Sales, however, increased by 59.42% over the previous quarter to $705.62 million. Despite the increase in sales this quarter, the decrease in earnings may suggest Pinterest is not utilizing their capital as effectively as possible. Pinterest collected $442.62 million in revenue during Q3, but reported earnings showed a $97.03 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 Q4, Pinterest posted an ROCE of 0.09%.

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 Pinterest 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 Pinterest, 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.

Q4 Earnings Insight

Pinterest reported Q4 earnings per share at $0.43/share, which beat analyst predictions of $0.32/share.