In This Article:
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Today we'll evaluate MS INTERNATIONAL plc (LON:MSI) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.'
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 MS INTERNATIONAL:
0.11 = UK£4.8m ÷ (UK£70m - UK£26m) (Based on the trailing twelve months to April 2019.)
So, MS INTERNATIONAL has an ROCE of 11%.
Check out our latest analysis for MS INTERNATIONAL
Is MS INTERNATIONAL's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, MS INTERNATIONAL's ROCE appears to be around the 11% average of the Aerospace & Defense industry. Independently of how MS INTERNATIONAL compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, MS INTERNATIONAL's ROCE appears to be 11%, compared to 3 years ago, when its ROCE was 4.4%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if MS INTERNATIONAL has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do MS INTERNATIONAL'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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.