Today we'll look at Maison Internationale de l'Informatique S.A.S. (EPA:ALMII) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Maison Internationale de l'InformatiqueS:
0.12 = €3.2m ÷ (€42m - €15m) (Based on the trailing twelve months to June 2019.)
Therefore, Maison Internationale de l'InformatiqueS has an ROCE of 12%.
Does Maison Internationale de l'InformatiqueS Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Maison Internationale de l'InformatiqueS's ROCE is around the 11% average reported by the Consumer Services industry. Regardless of where Maison Internationale de l'InformatiqueS sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how Maison Internationale de l'InformatiqueS's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Maison Internationale de l'InformatiqueS.
How Maison Internationale de l'InformatiqueS's Current Liabilities Impact Its 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 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.
Maison Internationale de l'InformatiqueS has total assets of €42m and current liabilities of €15m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. With this level of current liabilities, Maison Internationale de l'InformatiqueS's ROCE is boosted somewhat.
What We Can Learn From Maison Internationale de l'InformatiqueS's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Maison Internationale de l'InformatiqueS 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.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.