Are Morion Inc.’s Returns On Capital Worth Investigating?

Today we’ll look at Morion Inc. (MCX:MORI) 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding 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. 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?

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 Morion:

0.13 = ₽179m ÷ (₽2.1b – ₽735m) (Based on the trailing twelve months to June 2019.)

So, Morion has an ROCE of 13%.

See our latest analysis for Morion

Does Morion Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Morion’s ROCE appears to be around the 12% average of the Communications industry. Setting aside the industry comparison for now, Morion’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.

Our data shows that Morion currently has an ROCE of 13%, compared to its ROCE of 10% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Morion’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

MISX:MORI Past Revenue and Net Income March 26th 2020
MISX:MORI Past Revenue and Net Income March 26th 2020

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. ROCE is, after all, simply a snap shot of a single year. You can check if Morion has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Morion’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. 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.

Morion has total assets of ₽2.1b and current liabilities of ₽735m. As a result, its current liabilities are equal to approximately 35% of its total assets. Morion has a medium level of current liabilities, which would boost its ROCE somewhat.

The Bottom Line On Morion’s ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.