In This Article:
Today we are going to look at Macquarie Telecom Group Limited (ASX:MAQ) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Macquarie Telecom Group:
0.23 = AU$25m ÷ (AU$146m - AU$40m) (Based on the trailing twelve months to December 2018.)
So, Macquarie Telecom Group has an ROCE of 23%.
View our latest analysis for Macquarie Telecom Group
Is Macquarie Telecom Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Macquarie Telecom Group's ROCE is meaningfully better than the 8.2% average in the Telecom industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Macquarie Telecom Group's ROCE currently appears to be excellent.
Our data shows that Macquarie Telecom Group currently has an ROCE of 23%, compared to its ROCE of 0.8% 3 years ago. This makes us wonder if the company is improving.
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. 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 Macquarie Telecom Group.
How Macquarie Telecom Group's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.