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Today we'll look at Daily Mail and General Trust plc (LON:DMGT) 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.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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 amount of pre-tax profits a company can generate from the capital employed 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?
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 Daily Mail and General Trust:
0.12 = UK£119m ÷ (UK£2.4b - UK£1.4b) (Based on the trailing twelve months to March 2019.)
Therefore, Daily Mail and General Trust has an ROCE of 12%.
Check out our latest analysis for Daily Mail and General Trust
Does Daily Mail and General Trust Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Daily Mail and General Trust's ROCE appears to be substantially greater than the 9.5% average in the Media industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Daily Mail and General Trust compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Daily Mail and General Trust's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Daily Mail and General Trust.
Daily Mail and General Trust's Current Liabilities And Their Impact On 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 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.