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What Can We Make Of Moneysupermarket.com Group PLC’s (LON:MONY) High Return On Capital?

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Today we’ll evaluate Moneysupermarket.com Group PLC (LON:MONY) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. Overall, it is a valuable metric that has its flaws. 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?

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 Moneysupermarket.com Group:

0.63 = UK£107m ÷ (UK£240m – UK£60m) (Based on the trailing twelve months to June 2018.)

So, Moneysupermarket.com Group has an ROCE of 63%.

See our latest analysis for Moneysupermarket.com Group

Is Moneysupermarket.com Group’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Moneysupermarket.com Group’s ROCE appears to be substantially greater than the 22% average in the Online Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Moneysupermarket.com Group’s ROCE is currently very good.

LSE:MONY Last Perf February 5th 19
LSE:MONY Last Perf February 5th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Moneysupermarket.com Group.

How Moneysupermarket.com Group’s Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Moneysupermarket.com Group has total liabilities of UK£60m and total assets of UK£240m. As a result, its current liabilities are equal to approximately 25% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

What We Can Learn From Moneysupermarket.com Group’s ROCE

This is good to see, and with such a high ROCE, Moneysupermarket.com Group may be worth a closer look. But note: Moneysupermarket.com Group 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).

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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.