Today we'll evaluate MásMóvil Ibercom, S.A. (BME:MAS) to determine whether it could have potential as an investment idea. 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, 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 'return' (pre-tax profit) a company generates from capital employed 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.
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 MásMóvil Ibercom:
0.11 = €175m ÷ (€3.2b - €1.6b) (Based on the trailing twelve months to June 2019.)
Therefore, MásMóvil Ibercom has an ROCE of 11%.
Does MásMóvil Ibercom Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that MásMóvil Ibercom's ROCE is meaningfully better than the 8.6% average in the Telecom industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where MásMóvil Ibercom sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
MásMóvil Ibercom delivered an ROCE of 11%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can click on the image below to see (in greater detail) how MásMóvil Ibercom'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 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for MásMóvil Ibercom.
What Are Current Liabilities, And How Do They Affect MásMóvil Ibercom's 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.
MásMóvil Ibercom has total liabilities of €1.6b and total assets of €3.2b. Therefore its current liabilities are equivalent to approximately 49% of its total assets. MásMóvil Ibercom has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On MásMóvil Ibercom's ROCE
MásMóvil Ibercom's ROCE does look good, but the level of current liabilities also contribute to that. MásMóvil Ibercom looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
MásMóvil Ibercom is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.