Today we'll evaluate Macro Enterprises Inc. (CVE:MCR) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Macro Enterprises:
0.39 = CA$60m ÷ (CA$235m - CA$80m) (Based on the trailing twelve months to September 2019.)
Therefore, Macro Enterprises has an ROCE of 39%.
Does Macro Enterprises Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Macro Enterprises's ROCE appears to be substantially greater than the 7.6% average in the Energy Services 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, Macro Enterprises's ROCE is currently very good.
Macro Enterprises has an ROCE of 39%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Macro Enterprises'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, Macro Enterprises could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Macro Enterprises.
What Are Current Liabilities, And How Do They Affect Macro Enterprises's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Macro Enterprises has total liabilities of CA$80m and total assets of CA$235m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Macro Enterprises's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Macro Enterprises's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Macro Enterprises 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.
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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