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Why You Should Like Mitie Group plc’s (LON:MTO) ROCE

Simply Wall St

Today we'll look at Mitie Group plc (LON:MTO) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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 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?

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 Mitie Group:

0.20 = UK£89m ÷ (UK£1.0b - UK£606m) (Based on the trailing twelve months to September 2019.)

So, Mitie Group has an ROCE of 20%.

View our latest analysis for Mitie Group

Does Mitie Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Mitie Group's ROCE appears to be substantially greater than the 10% average in the Commercial Services 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. Putting aside its position relative to its industry for now, in absolute terms, Mitie Group's ROCE is currently very good.

In our analysis, Mitie Group's ROCE appears to be 20%, compared to 3 years ago, when its ROCE was 14%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Mitie Group's past growth compares to other companies.

LSE:MTO Past Revenue and Net Income, January 25th 2020

It is important to remember that ROCE shows past performance, and is 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. 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 Mitie Group.

Do Mitie Group's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Mitie Group has total liabilities of UK£606m and total assets of UK£1.0b. As a result, its current liabilities are equal to approximately 58% of its total assets. Mitie Group boasts an attractive ROCE, even after considering the boost from high current liabilities.

The Bottom Line On Mitie Group's ROCE

So to us, the company is potentially worth investigating further. Mitie Group 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.

I will like Mitie Group 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.

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