Return On Capital Employed Overview: IBM

IBM IBM showed a loss in earnings since Q1, totaling $1.18 billion. Sales, on the other hand, increased by 3.14% to $18.12 billion during Q2. In Q1, IBM hit $14.77 billion in earnings, but sales only totaled $17.57 billion.

What Is Return On Capital Employed?

Changes in earnings and sales indicate shifts in IBM’s Return on Capital Employed, a measure of yearly pre-tax profit relative to capital employed in a business. Generally, a higher ROCE suggests successful growth in a company and is a sign of higher earnings per share for shareholders in the future. In Q2, IBM posted an ROCE of 14.14%.

It is important to keep in mind ROCE evaluates past performance and is not used as a predictive tool. It is a good measure of a company's recent performance, but several factors could affect earnings and sales in the near future.

ROCE is an important metric for the comparison of similar companies. A relatively high ROCE shows IBM 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 lead to higher returns and earnings per share growth.

For IBM, 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

IBM reported Q2 earnings per share at $2.18/share against analyst predictions of $2.07/share.