In This Article:
Today we'll evaluate MEP Infrastructure Developers Limited (NSE:MEP) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 MEP Infrastructure Developers:
0.15 = ₹4.2b ÷ (₹52b - ₹24b) (Based on the trailing twelve months to June 2019.)
So, MEP Infrastructure Developers has an ROCE of 15%.
Check out our latest analysis for MEP Infrastructure Developers
Is MEP Infrastructure Developers's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that MEP Infrastructure Developers's ROCE is meaningfully better than the 5.9% average in the Infrastructure 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 industry comparison for now, MEP Infrastructure Developers's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , MEP Infrastructure Developers currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 11%. This makes us wonder if the company is improving. You can see in the image below how MEP Infrastructure Developers'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. ROCE is only a point-in-time measure. You can check if MEP Infrastructure Developers has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.