Don’t Buy MásMóvil Ibercom, S.A. (BME:MAS) Until You Understand Its ROCE

Today we'll look at MásMóvil Ibercom, S.A. (BME:MAS) 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. Next, we'll compare it to others in its industry. 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. Overall, it is a valuable metric that has its flaws. 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?

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 MásMóvil Ibercom:

0.076 = €149m ÷ (€3.3b - €1.3b) (Based on the trailing twelve months to December 2019.)

So, MásMóvil Ibercom has an ROCE of 7.6%.

Check out our latest analysis for MásMóvil Ibercom

Is MásMóvil Ibercom's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, MásMóvil Ibercom's ROCE appears to be around the 8.9% average of the Telecom industry. Setting aside the industry comparison for now, 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 has an ROCE of 7.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how MásMóvil Ibercom's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for MásMóvil Ibercom.

Do MásMóvil Ibercom's Current Liabilities Skew Its 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.

MásMóvil Ibercom has current liabilities of €1.3b and total assets of €3.3b. As a result, its current liabilities are equal to approximately 40% of its total assets. MásMóvil Ibercom has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From MásMóvil Ibercom's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might also be able to find a better stock than MásMóvil Ibercom. 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.

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.