Why We Like M.T.I Wireless Edge Ltd.’s (LON:MWE) 15% Return On Capital Employed
Today we'll evaluate M.T.I Wireless Edge Ltd. (LON:MWE) 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. Next, we'll compare it to others in its industry. 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 M.T.I Wireless Edge:
0.15 = US$3.7m ÷ (US$34m - US$9.0m) (Based on the trailing twelve months to March 2020.)
So, M.T.I Wireless Edge has an ROCE of 15%.
View our latest analysis for M.T.I Wireless Edge
Is M.T.I Wireless Edge's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. M.T.I Wireless Edge's ROCE appears to be substantially greater than the 6.8% average in the Communications 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. Regardless of where M.T.I Wireless Edge sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, M.T.I Wireless Edge's ROCE appears to be 15%, compared to 3 years ago, when its ROCE was 9.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how M.T.I Wireless Edge's past growth compares to other companies.
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 only a point-in-time measure. If M.T.I Wireless Edge is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do M.T.I Wireless Edge'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.
M.T.I Wireless Edge has current liabilities of US$9.0m and total assets of US$34m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On M.T.I Wireless Edge's ROCE
This is good to see, and with a sound ROCE, M.T.I Wireless Edge could be worth a closer look. M.T.I Wireless Edge looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like M.T.I Wireless Edge better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
