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Why You Should Care About Mercurity Fintech Holding Inc.’s (NASDAQ:MFH) Low Return On Capital

Today we'll look at Mercurity Fintech Holding Inc. (NASDAQ:MFH) and reflect on its potential as an investment. 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.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Mercurity Fintech Holding:

0.057 = US$456k ÷ (US$8.9m - US$837k) (Based on the trailing twelve months to December 2019.)

Therefore, Mercurity Fintech Holding has an ROCE of 5.7%.

Check out our latest analysis for Mercurity Fintech Holding

Does Mercurity Fintech Holding Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Mercurity Fintech Holding's ROCE is meaningfully below the Online Retail industry average of 7.6%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Mercurity Fintech Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Mercurity Fintech Holding delivered an ROCE of 5.7%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Mercurity Fintech Holding's past growth compares to other companies.

NasdaqCM:MFH Past Revenue and Net Income June 14th 2020
NasdaqCM:MFH Past Revenue and Net Income June 14th 2020

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 only a point-in-time measure. You can check if Mercurity Fintech Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Mercurity Fintech Holding's Current Liabilities Impact Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Mercurity Fintech Holding has total assets of US$8.9m and current liabilities of US$837k. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. Mercurity Fintech Holding reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Mercurity Fintech Holding's ROCE

Mercurity Fintech Holding looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Mercurity Fintech Holding. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Mercurity Fintech Holding better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.