Why MGI Digital Technology Société Anonyme’s (EPA:ALMDG) Return On Capital Employed Is Impressive
Today we'll look at MGI Digital Technology Société Anonyme (EPA:ALMDG) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 MGI Digital Technology Société Anonyme:
0.18 = €19m ÷ (€121m - €14m) (Based on the trailing twelve months to June 2019.)
Therefore, MGI Digital Technology Société Anonyme has an ROCE of 18%.
See our latest analysis for MGI Digital Technology Société Anonyme
Does MGI Digital Technology Société Anonyme Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that MGI Digital Technology Société Anonyme's ROCE is meaningfully better than the 4.2% average in the Tech industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where MGI Digital Technology Société Anonyme sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, MGI Digital Technology Société Anonyme currently has an ROCE of 18% compared to its ROCE 3 years ago, which was 14%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how MGI Digital Technology Société Anonyme's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for MGI Digital Technology Société Anonyme.
Do MGI Digital Technology Société Anonyme's Current Liabilities Skew 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
MGI Digital Technology Société Anonyme has total assets of €121m and current liabilities of €14m. As a result, its current liabilities are equal to approximately 12% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On MGI Digital Technology Société Anonyme's ROCE
Overall, MGI Digital Technology Société Anonyme has a decent ROCE and could be worthy of further research. There might be better investments than MGI Digital Technology Société Anonyme 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.
I will like MGI Digital Technology Société Anonyme better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
