Today we'll evaluate Miquel y Costas & Miquel, S.A. (BME:MCM) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 Miquel y Costas & Miquel:
0.15 = €52m ÷ (€413m - €62m) (Based on the trailing twelve months to September 2019.)
So, Miquel y Costas & Miquel has an ROCE of 15%.
Is Miquel y Costas & Miquel's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Miquel y Costas & Miquel's ROCE is meaningfully better than the 7.8% average in the Forestry industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Miquel y Costas & Miquel 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 Miquel y Costas & Miquel'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, 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 Miquel y Costas & Miquel.
Do Miquel y Costas & Miquel's Current Liabilities Skew Its 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Miquel y Costas & Miquel has total liabilities of €62m and total assets of €413m. As a result, its current liabilities are equal to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.
What We Can Learn From Miquel y Costas & Miquel's ROCE
Overall, Miquel y Costas & Miquel has a decent ROCE and could be worthy of further research. There might be better investments than Miquel y Costas & Miquel 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.
Miquel y Costas & Miquel is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.