Today we’ll look at Mycronic AB (publ) (STO:MYCR) and reflect on its potential as an investment. 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Mycronic:
0.21 = kr746m ÷ (kr5.3b – kr1.6b) (Based on the trailing twelve months to March 2020.)
Therefore, Mycronic has an ROCE of 21%.
Is Mycronic’s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Mycronic’s ROCE is meaningfully better than the 13% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Mycronic’s ROCE in absolute terms currently looks quite high.
Mycronic’s current ROCE of 21% is lower than its ROCE in the past, which was 44%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Mycronic’s past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Mycronic’s Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Mycronic has current liabilities of kr1.6b and total assets of kr5.3b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. A medium level of current liabilities boosts Mycronic’s ROCE somewhat.
The Bottom Line On Mycronic’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Mycronic out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.