Today we are going to look at MGI Digital Technology Société Anonyme (EPA:ALMDG) to see whether it might be an attractive investment prospect. 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, 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.

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. 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?

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 MGI Digital Technology Société Anonyme:

0.18 = €18m ÷ (€116m - €18m) (Based on the trailing twelve months to December 2018.)

So, MGI Digital Technology Société Anonyme has an ROCE of 18%.

See our latest analysis for MGI Digital Technology Société Anonyme

Does MGI Digital Technology Société Anonyme Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. MGI Digital Technology Société Anonyme's ROCE appears to be substantially greater than the 11% average in the Tech industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from MGI Digital Technology Société Anonyme's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that MGI Digital Technology Société Anonyme currently has an ROCE of 18%, compared to its ROCE of 13% 3 years ago. This makes us think the business might be improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for MGI Digital Technology Société Anonyme.

What Are Current Liabilities, And How Do They Affect MGI Digital Technology Société Anonyme's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

MGI Digital Technology Société Anonyme has total assets of €116m and current liabilities of €18m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On MGI Digital Technology Société Anonyme's ROCE

This is good to see, and with a sound ROCE, MGI Digital Technology Société Anonyme could be worth a closer look. MGI Digital Technology Société Anonyme shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.