How Do Maman-Cargo Terminals & Handling Ltd.’s (TLV:MMAN) Returns On Capital Compare To Peers?

Today we'll look at Maman-Cargo Terminals & Handling Ltd. (TLV:MMAN) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. 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?

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 Maman-Cargo Terminals & Handling:

0.043 = ₪57m ÷ (₪1.7b - ₪381m) (Based on the trailing twelve months to September 2019.)

Therefore, Maman-Cargo Terminals & Handling has an ROCE of 4.3%.

View our latest analysis for Maman-Cargo Terminals & Handling

Does Maman-Cargo Terminals & Handling Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Maman-Cargo Terminals & Handling's ROCE appears to be significantly below the 6.7% average in the Infrastructure industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Maman-Cargo Terminals & Handling's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Maman-Cargo Terminals & Handling's current ROCE of 4.3% is lower than its ROCE in the past, which was 6.8%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Maman-Cargo Terminals & Handling's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and 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. How cyclical is Maman-Cargo Terminals & Handling? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Maman-Cargo Terminals & Handling's Current Liabilities Skew Its ROCE?

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

Maman-Cargo Terminals & Handling has total assets of ₪1.7b and current liabilities of ₪381m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Maman-Cargo Terminals & Handling's ROCE

If Maman-Cargo Terminals & Handling continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Maman-Cargo Terminals & Handling. 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.