Should You Like MJ Gleeson plc’s (LON:GLE) High Return On Capital Employed?

Today we'll look at MJ Gleeson plc (LON:GLE) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

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.

How Do You Calculate Return On Capital Employed?

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 MJ Gleeson:

0.19 = UK£41m ÷ (UK£281m - UK£68m) (Based on the trailing twelve months to June 2019.)

So, MJ Gleeson has an ROCE of 19%.

View our latest analysis for MJ Gleeson

Does MJ Gleeson Have A Good ROCE?

One way to assess ROCE is to compare similar companies. MJ Gleeson's ROCE appears to be substantially greater than the 16% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, MJ Gleeson's ROCE is currently very good.

You can click on the image below to see (in greater detail) how MJ Gleeson'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. 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 MJ Gleeson.

How MJ Gleeson's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

MJ Gleeson has current liabilities of UK£68m and total assets of UK£281m. As a result, its current liabilities are equal to approximately 24% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On MJ Gleeson's ROCE

This is good to see, and with such a high ROCE, MJ Gleeson may be worth a closer look. MJ Gleeson 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.