Don’t Buy McBride plc (LON:MCB) Until You Understand Its ROCE

Today we are going to look at McBride plc (LON:MCB) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for McBride:

0.13 = UK£26m ÷ (UK£435m – UK£237m) (Based on the trailing twelve months to June 2019.)

So, McBride has an ROCE of 13%.

See our latest analysis for McBride

Does McBride Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that McBride’s ROCE is fairly close to the Household Products industry average of 12%. Separate from McBride’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how McBride’s ROCE compares to its industry. Click to see more on past growth.

LSE:MCB Past Revenue and Net Income, January 20th 2020
LSE:MCB Past Revenue and Net Income, January 20th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for McBride.

How McBride’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

McBride has total assets of UK£435m and current liabilities of UK£237m. Therefore its current liabilities are equivalent to approximately 55% of its total assets. McBride has a relatively high level of current liabilities, boosting its ROCE meaningfully.

The Bottom Line On McBride’s ROCE

While its ROCE looks decent, it wouldn’t look so good if it reduced current liabilities. McBride looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

McBride is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.