Is The Meet Group, Inc. (NASDAQ:MEET) Investing Your Capital Efficiently?
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Today we'll evaluate The Meet Group, Inc. (NASDAQ:MEET) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. 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?
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 Meet Group:
0.053 = US$12m ÷ (US$271m - US$46m) (Based on the trailing twelve months to March 2019.)
So, Meet Group has an ROCE of 5.3%.
Check out our latest analysis for Meet Group
Does Meet Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Meet Group's ROCE appears to be significantly below the 9.2% average in the Interactive Media and Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Meet Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Meet Group's current ROCE of 5.3% is lower than 3 years ago, when the company reported a 8.0% ROCE. So investors might consider if it has had issues recently. The image below shows how Meet Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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 Meet Group.
Do Meet Group's Current Liabilities Skew 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Meet Group has total assets of US$271m and current liabilities of US$46m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Meet Group's ROCE
Meet Group has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than Meet Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 editorial-team@simplywallst.com. 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.
