Yahoo Finance Shareholders Should Look Hard At McCarthy & Stone plc’s (LON:MCS) 7.0%Return On Capital
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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.
How Do You Calculate Return On Capital Employed?
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 McCarthy & Stone:
0.07 = UK£58m ÷ (UK£963m - UK£135m) (Based on the trailing twelve months to February 2019.)
So, McCarthy & Stone has an ROCE of 7.0%.
Check out our latest analysis for McCarthy & Stone
Is McCarthy & Stone's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see McCarthy & Stone's ROCE is meaningfully below the Consumer Durables industry average of 16%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, 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 7.0% is lower than its ROCE in the past, which was 13%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how McCarthy & Stone's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 McCarthy & Stone.
What Are Current Liabilities, And How Do They Affect McCarthy & Stone's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
McCarthy & Stone has total liabilities of UK£135m and total assets of UK£963m. As a result, its current liabilities are equal to approximately 14% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On McCarthy & Stone's ROCE
With that in mind, we're not overly impressed with McCarthy & Stone's ROCE, so it may not be the most appealing prospect. Of course, you might also 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.
I will like McCarthy & Stone better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
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.
