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What Can We Make Of Macquarie Telecom Group Limited’s (ASX:MAQ) High Return On Capital?

Simply Wall St

Today we'll look at Macquarie Telecom Group Limited (ASX:MAQ) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. 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.

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 Macquarie Telecom Group:

0.20 = AU$24m ÷ (AU$161m - AU$43m) (Based on the trailing twelve months to June 2019.)

Therefore, Macquarie Telecom Group has an ROCE of 20%.

View our latest analysis for Macquarie Telecom Group

Does Macquarie Telecom Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Macquarie Telecom Group's ROCE is meaningfully higher than the 10% average in the Telecom 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. Setting aside the comparison to its industry for a moment, Macquarie Telecom Group's ROCE in absolute terms currently looks quite high.

In our analysis, Macquarie Telecom Group's ROCE appears to be 20%, compared to 3 years ago, when its ROCE was 7.9%. This makes us think the business might be improving. You can see in the image below how Macquarie Telecom Group's ROCE compares to its industry. Click to see more on past growth.

ASX:MAQ Past Revenue and Net Income, December 9th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, 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 Macquarie Telecom Group.

How Macquarie Telecom 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Macquarie Telecom Group has total assets of AU$161m and current liabilities of AU$43m. As a result, its current liabilities are equal to approximately 27% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

The Bottom Line On Macquarie Telecom Group's ROCE

This is good to see, and with such a high ROCE, Macquarie Telecom Group may be worth a closer look. Macquarie Telecom Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Macquarie Telecom 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.

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.