New Relic's Return On Capital Employed Overview

New Relic NEWR brought in sales totaling $180.48 million during Q1 according to data provided by Benzinga Pro. However, earnings decreased 36.05%, resulting in a loss of $73.89 million. In Q4, New Relic brought in $172.67 million in sales but lost $54.31 million in earnings.

Why Is ROCE 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 Q1, New Relic posted an ROCE of -0.21%.

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 New Relic 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 New Relic, a negative ROCE ratio of -0.21% suggests that management may not be effectively allocating their capital.Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns; poor capital allocation can be a leech on the performance of a company over time.

Upcoming Earnings Estimate

New Relic reported Q1 earnings per share at $-0.25/share, which beat analyst predictions of $-0.37/share.