Yahoo Finance Moneysupermarket.com Group PLC (LON:MONY) Earns A Nice Return On Capital Employed
Today we'll evaluate Moneysupermarket.com Group PLC (LON:MONY) 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 up, we'll look at what ROCE is and how we calculate it. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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. 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:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Moneysupermarket.com Group:
0.57 = UK£121m ÷ (UK£307m - UK£94m) (Based on the trailing twelve months to June 2019.)
So, Moneysupermarket.com Group has an ROCE of 57%.
Check out 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 12% average in the Online Retail industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Moneysupermarket.com Group's ROCE is currently very good.
You can click on the image below to see (in greater detail) how Moneysupermarket.com Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Moneysupermarket.com Group's Current Liabilities Skew 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.
Moneysupermarket.com Group has current liabilities of UK£94m and total assets of UK£307m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Moneysupermarket.com Group's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Moneysupermarket.com Group's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Moneysupermarket.com Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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