In This Article:
Today we'll look at Macquarie Telecom Group Limited (ASX:MAQ) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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 Macquarie Telecom Group:
0.20 = AU$24m ÷ (AU$161m - AU$43m) (Based on the trailing twelve months to June 2019.)
Therefore, Macquarie Telecom Group has an ROCE of 20%.
View our latest analysis for Macquarie Telecom Group
Does Macquarie Telecom Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Macquarie Telecom Group's ROCE is meaningfully higher than the 10% average in the Telecom 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. Setting aside the comparison to its industry for a moment, Macquarie Telecom Group's ROCE in absolute terms currently looks quite high.
In our analysis, Macquarie Telecom Group's ROCE appears to be 20%, compared to 3 years ago, when its ROCE was 7.9%. This makes us think the business might be improving. You can see in the image below how Macquarie Telecom Group'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. 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Macquarie Telecom Group.