How Do Monrif S.p.A.’s (BIT:MON) Returns Compare To Its Industry?
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Today we are going to look at Monrif S.p.A. (BIT:MON) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to 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 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Monrif:
0.019 = €2.6m ÷ (€233m - €101m) (Based on the trailing twelve months to March 2019.)
Therefore, Monrif has an ROCE of 1.9%.
See our latest analysis for Monrif
Does Monrif Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Monrif's ROCE appears to be significantly below the 7.8% average in the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Monrif compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. There are potentially more appealing investments elsewhere.
Monrif's current ROCE of 1.9% is lower than 3 years ago, when the company reported a 9.0% ROCE. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Monrif? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Monrif's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Monrif has total liabilities of €101m and total assets of €233m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. Monrif has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
The Bottom Line On Monrif's ROCE
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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.
