Today we'll evaluate Metro Inc. (TSE:MRU) 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. And finally, we'll look at how its current liabilities are impacting 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. 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'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Metro:
0.11 = CA$1.0b ÷ (CA$11b - CA$1.3b) (Based on the trailing twelve months to July 2019.)
So, Metro has an ROCE of 11%.
Does Metro Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Metro's ROCE appears to be substantially greater than the 8.1% average in the Consumer Retailing industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Metro's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Metro's current ROCE of 11% is lower than 3 years ago, when the company reported a 16% ROCE. So investors might consider if it has had issues recently. The image below shows how Metro's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Metro's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Metro has total liabilities of CA$1.3b and total assets of CA$11b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Metro's ROCE
Overall, Metro has a decent ROCE and could be worthy of further research. There might be better investments than Metro 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.
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