Should You Care About Dover Motorsports, Inc.’s (NYSE:DVD) Investment Potential?
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Today we'll look at Dover Motorsports, Inc. (NYSE:DVD) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?
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 Dover Motorsports:
0.097 = US$7.2m ÷ (US$79m - US$4.5m) (Based on the trailing twelve months to December 2018.)
So, Dover Motorsports has an ROCE of 9.7%.
See our latest analysis for Dover Motorsports
Does Dover Motorsports Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Dover Motorsports's ROCE appears to be around the 10% average of the Hospitality industry. Aside from the industry comparison, Dover Motorsports's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Dover Motorsports has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Dover Motorsports's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Dover Motorsports has total liabilities of US$4.5m and total assets of US$79m. Therefore its current liabilities are equivalent to approximately 5.7% of its total assets. Dover Motorsports has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On Dover Motorsports's ROCE
Based on this information, Dover Motorsports appears to be a mediocre business. Of course you might be able to find a better stock than Dover Motorsports. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
