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Why We Like Daily Mail and General Trust plc’s (LON:DMGT) 12% Return On Capital Employed

Simply Wall St

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Today we'll look at Daily Mail and General Trust plc (LON:DMGT) and reflect on its potential as an investment. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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.'

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 Daily Mail and General Trust:

0.12 = UK£119m ÷ (UK£2.4b - UK£1.4b) (Based on the trailing twelve months to March 2019.)

Therefore, Daily Mail and General Trust has an ROCE of 12%.

Check out our latest analysis for Daily Mail and General Trust

Does Daily Mail and General Trust Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Daily Mail and General Trust's ROCE appears to be substantially greater than the 9.5% average in the Media industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Daily Mail and General Trust compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Daily Mail and General Trust's ROCE compares to its industry, and you can click it to see more detail on its past growth.

LSE:DMGT Past Revenue and Net Income, July 15th 2019

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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Daily Mail and General Trust.

Daily Mail and General Trust's Current Liabilities And Their Impact On 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Daily Mail and General Trust has total liabilities of UK£1.4b and total assets of UK£2.4b. Therefore its current liabilities are equivalent to approximately 58% of its total assets. Daily Mail and General Trust has a relatively high level of current liabilities, boosting its ROCE meaningfully.

What We Can Learn From Daily Mail and General Trust's ROCE

This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Daily Mail and General Trust looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.