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# Is Mirbud S.A. (WSE:MRB) Struggling With Its 6.6% Return On Capital Employed?

Today we’ll look at Mirbud S.A. (WSE:MRB) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

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

ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

### 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 Mirbud:

0.066 = zł45m ÷ (zł1.2b – zł438m) (Based on the trailing twelve months to September 2018.)

Therefore, Mirbud has an ROCE of 6.6%.

### Is Mirbud’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Mirbud’s ROCE is meaningfully below the Construction industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Mirbud’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.

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. How cyclical is Mirbud? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

### How Mirbud’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Mirbud has total liabilities of zł438m and total assets of zł1.2b. As a result, its current liabilities are equal to approximately 38% of its total assets. Mirbud’s ROCE is improved somewhat by its moderate amount of current liabilities.

### What We Can Learn From Mirbud’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: Mirbud may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Mirbud better if I see some big insider buys. While we wait, check out this free list 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.