Examining MOQ Limited’s (ASX:MOQ) Weak Return On Capital Employed
Today we'll evaluate MOQ Limited (ASX:MOQ) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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 MOQ:
0.031 = AU$660k ÷ (AU$35m - AU$14m) (Based on the trailing twelve months to June 2019.)
Therefore, MOQ has an ROCE of 3.1%.
View our latest analysis for MOQ
Is MOQ's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see MOQ's ROCE is meaningfully below the Software industry average of 17%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how MOQ compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. Readers may wish to look for more rewarding investments.
MOQ has an ROCE of 3.1%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can click on the image below to see (in greater detail) how MOQ's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. If MOQ is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect MOQ's 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 counter this, investors can check if a company has high current liabilities relative to total assets.
MOQ has total liabilities of AU$14m and total assets of AU$35m. Therefore its current liabilities are equivalent to approximately 39% of its total assets. With a medium level of current liabilities boosting the ROCE a little, MOQ's low ROCE is unappealing.
What We Can Learn From MOQ's ROCE
So researching other companies may be a better use of your time. You might be able to find a better investment than MOQ. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.
