Does Mediagrif Interactive Technologies Inc. (TSE:MDF) Create Value For Shareholders?

Today we’ll look at Mediagrif Interactive Technologies Inc. (TSE:MDF) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 Mediagrif Interactive Technologies:

0.088 = CA$16m ÷ (CA$208m – CA$29m) (Based on the trailing twelve months to December 2018.)

Therefore, Mediagrif Interactive Technologies has an ROCE of 8.8%.

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Does Mediagrif Interactive Technologies Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Mediagrif Interactive Technologies’s ROCE appears to be around the 9.7% average of the Interactive Media and Services industry. Separate from how Mediagrif Interactive Technologies stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Mediagrif Interactive Technologies’s current ROCE of 8.8% is lower than 3 years ago, when the company reported a 14% ROCE. Therefore we wonder if the company is facing new headwinds.

TSX:MDF Past Revenue and Net Income, May 16th 2019
TSX:MDF Past Revenue and Net Income, May 16th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Mediagrif Interactive Technologies’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Mediagrif Interactive Technologies has total liabilities of CA$29m and total assets of CA$208m. As a result, its current liabilities are equal to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Mediagrif Interactive Technologies’s ROCE

With that in mind, we’re not overly impressed with Mediagrif Interactive Technologies’s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Mediagrif Interactive Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.