Today we are going to look at ManpowerGroup Inc. (NYSE:MAN) to see whether it might be an attractive investment prospect. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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.
How Do You Calculate Return On Capital Employed?
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:
0.16 = US$746m ÷ (US$8.8b - US$4.1b) (Based on the trailing twelve months to September 2019.)
So, ManpowerGroup has an ROCE of 16%.
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 11% 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. Independently of how ManpowerGroup compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how ManpowerGroup's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect ManpowerGroup's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
ManpowerGroup has current liabilities of US$4.1b and total assets of US$8.8b. As a result, its current liabilities are equal to approximately 47% of its total assets. ManpowerGroup has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From ManpowerGroup's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. ManpowerGroup 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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