Yahoo Finance Is Mitchell Services Limited’s (ASX:MSV) 31% ROCE Any Good?
Today we'll look at Mitchell Services Limited (ASX:MSV) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Mitchell Services:
0.31 = AU$14m ÷ (AU$70m - AU$26m) (Based on the trailing twelve months to June 2019.)
So, Mitchell Services has an ROCE of 31%.
Check out our latest analysis for Mitchell Services
Is Mitchell Services's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Mitchell Services's ROCE appears to be substantially greater than the 8.0% average in the Metals and Mining 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, Mitchell Services's ROCE is currently very good.
Mitchell Services delivered an ROCE of 31%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can see in the image below how Mitchell Services's ROCE compares to its industry. Click to see more on past growth.
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. We note Mitchell Services could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Mitchell Services.
Mitchell Services's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Mitchell Services has total assets of AU$70m and current liabilities of AU$26m. As a result, its current liabilities are equal to approximately 38% of its total assets. Mitchell Services's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Mitchell Services's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Mitchell Services 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.
Mitchell Services is not the only stock insiders are buying. So take a peek at this free list of growing companies with 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.
