Is MEP Infrastructure Developers Limited’s (NSE:MEP) 15% ROCE Any Good?

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.

What Are Current Liabilities, And How Do They Affect MEP Infrastructure Developers's 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.

MEP Infrastructure Developers has total assets of ₹52b and current liabilities of ₹24b. As a result, its current liabilities are equal to approximately 47% of its total assets. MEP Infrastructure Developers has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On MEP Infrastructure Developers's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like MEP Infrastructure Developers better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.