Today we'll look at Manitou BF SA (EPA:MTU) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Manitou BF:
0.19 = €156m ÷ (€1.5b - €652m) (Based on the trailing twelve months to June 2019.)
Therefore, Manitou BF has an ROCE of 19%.
Is Manitou BF's ROCE Good?
One way to assess ROCE is to compare similar companies. Manitou BF's ROCE appears to be substantially greater than the 11% average in the Machinery 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. Separate from Manitou BF's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Manitou BF currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 11%. This makes us wonder if the company is improving. You can see in the image below how Manitou BF's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Manitou BF.
How Manitou BF's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Manitou BF has total assets of €1.5b and current liabilities of €652m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. With this level of current liabilities, Manitou BF's ROCE is boosted somewhat.
The Bottom Line On Manitou BF's ROCE
Manitou BF's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Manitou BF 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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