A Close Look At MasTec, Inc.’s (NYSE:MTZ) 16% ROCE

Simply Wall St

Today we'll look at MasTec, Inc. (NYSE:MTZ) 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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?

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 MasTec:

0.16 = US$541m ÷ (US$4.8b - US$1.4b) (Based on the trailing twelve months to June 2019.)

So, MasTec has an ROCE of 16%.

View our latest analysis for MasTec

Is MasTec's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, MasTec's ROCE is meaningfully higher than the 9.7% average in the Construction 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. Independently of how MasTec compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, MasTec's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 5.5%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how MasTec's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:MTZ Past Revenue and Net Income, October 8th 2019
NYSE:MTZ Past Revenue and Net Income, October 8th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for MasTec.

MasTec's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.

MasTec has total assets of US$4.8b and current liabilities of US$1.4b. As a result, its current liabilities are equal to approximately 29% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On MasTec's ROCE

Overall, MasTec has a decent ROCE and could be worthy of further research. There might be better investments than MasTec out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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.

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