Today we are going to look at Momentum Group AB (publ) (STO:MMGR B) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. In general, businesses with a higher ROCE are usually better quality. 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 Momentum Group:
0.16 = kr307m ÷ (kr3.5b - kr1.5b) (Based on the trailing twelve months to September 2019.)
So, Momentum Group has an ROCE of 16%.
Does Momentum Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Momentum Group's ROCE appears to be around the 13% average of the Trade Distributors industry. Regardless of where Momentum Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Momentum Group currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 9.0%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Momentum Group's past growth compares to other companies.
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, 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 Momentum Group.
How Momentum 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Momentum Group has total liabilities of kr1.5b and total assets of kr3.5b. As a result, its current liabilities are equal to approximately 43% of its total assets. Momentum Group has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Momentum Group's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Momentum Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Momentum Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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