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How Do McCarthy & Stone plc’s (LON:MCS) Returns Compare To Its Industry?

Today we are going to look at McCarthy & Stone plc (LON:MCS) to see whether it might be an attractive investment prospect. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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?

The formula for calculating the return on capital employed is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for McCarthy & Stone:

0.08 = UK£66m ÷ (UK£995m – UK£178m) (Based on the trailing twelve months to August 2018.)

Therefore, McCarthy & Stone has an ROCE of 8.0%.

See our latest analysis for McCarthy & Stone

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Is McCarthy & Stone’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, McCarthy & Stone’s ROCE appears to be significantly below the 17% average in the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, McCarthy & Stone’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

McCarthy & Stone’s current ROCE of 8.0% is lower than 3 years ago, when the company reported a 14% ROCE. Therefore we wonder if the company is facing new headwinds.

LSE:MCS Last Perf January 17th 19
LSE:MCS Last Perf January 17th 19

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 McCarthy & Stone.

What Are Current Liabilities, And How Do They Affect McCarthy & Stone’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 counteract this, we check if a company has high current liabilities, relative to its total assets.

McCarthy & Stone has total assets of UK£995m and current liabilities of UK£178m. Therefore its current liabilities are equivalent to approximately 18% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On McCarthy & Stone’s ROCE

That said, McCarthy & Stone’s ROCE is mediocre, there may be more attractive investments around. Of course you might be able to find a better stock than McCarthy & Stone. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.