Today we’ll evaluate Meier Tobler Group AG (VTX:MTG) to determine whether it could have potential as an investment idea. 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 Meier Tobler Group:
0.057 = CHF18m ÷ (CHF471m – CHF156m) (Based on the trailing twelve months to June 2018.)
So, Meier Tobler Group has an ROCE of 5.7%.
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Does Meier Tobler Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Meier Tobler Group’s ROCE appears meaningfully below the 14% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Meier Tobler Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~3.7% available in government bonds. Readers may wish to look for more rewarding investments.
Meier Tobler Group’s current ROCE of 5.7% is lower than 3 years ago, when the company reported a 32% ROCE. So investors might consider if it has had issues recently.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Meier Tobler Group.
What Are Current Liabilities, And How Do They Affect Meier Tobler Group’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Meier Tobler Group has total assets of CHF471m and current liabilities of CHF156m. As a result, its current liabilities are equal to approximately 33% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Meier Tobler Group’s ROCE is concerning.
Our Take On Meier Tobler Group’s ROCE
This company may not be the most attractive investment prospect. You might be able to find a better buy than Meier Tobler Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.