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Today we'll look at MásMóvil Ibercom, S.A. (BME:MAS) 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.
First of all, we'll work out how to 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 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. Ultimately, it is a useful but imperfect metric. 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 MásMóvil Ibercom:
0.071 = €75m ÷ (€2.5b - €747m) (Based on the trailing twelve months to September 2018.)
Therefore, MásMóvil Ibercom has an ROCE of 7.1%.
Check out our latest analysis for MásMóvil Ibercom
Is MásMóvil Ibercom's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see MásMóvil Ibercom's ROCE is meaningfully below the Telecom industry average of 9.2%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, MásMóvil Ibercom's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
MásMóvil Ibercom reported an ROCE of 7.1% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our freereport on analyst forecasts for MásMóvil Ibercom.
MásMóvil Ibercom's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
MásMóvil Ibercom has total assets of €2.5b and current liabilities of €747m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. MásMóvil Ibercom has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On MásMóvil Ibercom's ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: MásMóvil Ibercom may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like MásMóvil Ibercom better if I see some big insider buys. While we wait, check out this freelist of growing companies with considerable, recent, insider 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 editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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