Today we'll look at ManpowerGroup Greater China Limited (HKG:2180) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 ManpowerGroup Greater China:
0.26 = CN¥187m ÷ (CN¥1.1b - CN¥429m) (Based on the trailing twelve months to June 2019.)
Therefore, ManpowerGroup Greater China has an ROCE of 26%.
Is ManpowerGroup Greater China's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that ManpowerGroup Greater China's ROCE is meaningfully better than the 12% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, ManpowerGroup Greater China's ROCE is currently very good.
You can click on the image below to see (in greater detail) how ManpowerGroup Greater China'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for ManpowerGroup Greater China.
What Are Current Liabilities, And How Do They Affect ManpowerGroup Greater China's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
ManpowerGroup Greater China has total assets of CN¥1.1b and current liabilities of CN¥429m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. ManpowerGroup Greater China has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On ManpowerGroup Greater China's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. There might be better investments than ManpowerGroup Greater China 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.
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.
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. Thank you for reading.