Yahoo Finance What Can We Make Of Match Group, Inc.’s (NASDAQ:MTCH) High Return On Capital?
Today we'll evaluate Match Group, Inc. (NASDAQ:MTCH) to determine whether it could have potential as an investment idea. 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. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Match Group:
0.28 = US$680m ÷ (US$2.8b - US$398m) (Based on the trailing twelve months to March 2020.)
So, Match Group has an ROCE of 28%.
View our latest analysis for Match Group
Does Match Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Match Group's ROCE appears to be substantially greater than the 8.1% average in the Interactive Media and Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Match Group's ROCE currently appears to be excellent.
We can see that, Match Group currently has an ROCE of 28% compared to its ROCE 3 years ago, which was 18%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Match Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Match Group's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Match Group has current liabilities of US$398m and total assets of US$2.8b. Therefore its current liabilities are equivalent to approximately 14% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On Match Group's ROCE
This is good to see, and with such a high ROCE, Match Group may be worth a closer look. Match Group 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 Match Group 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.
