Today we'll evaluate ManpowerGroup Inc. (NYSE:MAN) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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'.
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 ManpowerGroup:
0.17 = US$775m ÷ (US$9.0b - US$4.4b) (Based on the trailing twelve months to June 2019.)
So, ManpowerGroup has an ROCE of 17%.
Is ManpowerGroup's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, ManpowerGroup's ROCE is meaningfully higher than the 12% average in the Professional 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. Separate from ManpowerGroup's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can see in the image below how ManpowerGroup's ROCE compares to its industry. Click to see more on past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ManpowerGroup.
Do ManpowerGroup's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
ManpowerGroup has total liabilities of US$4.4b and total assets of US$9.0b. As a result, its current liabilities are equal to approximately 48% of its total assets. With this level of current liabilities, ManpowerGroup's ROCE is boosted somewhat.
What We Can Learn From ManpowerGroup's ROCE
ManpowerGroup's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than ManpowerGroup 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).
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.