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Should You Care About Marshall Motor Holdings Plc’s (LON:MMH) Investment Potential?

Simply Wall St

Today we'll look at Marshall Motor Holdings Plc (LON:MMH) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is 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. 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?

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 Marshall Motor Holdings:

0.096 = UK£32m ÷ (UK£951m - UK£619m) (Based on the trailing twelve months to December 2019.)

Therefore, Marshall Motor Holdings has an ROCE of 9.6%.

Check out our latest analysis for Marshall Motor Holdings

Does Marshall Motor Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Marshall Motor Holdings's ROCE appears to be around the 8.6% average of the Specialty Retail industry. Regardless of where Marshall Motor Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can click on the image below to see (in greater detail) how Marshall Motor Holdings's past growth compares to other companies.

AIM:MMH Past Revenue and Net Income April 29th 2020
AIM:MMH Past Revenue and Net Income April 29th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Marshall Motor Holdings.

Do Marshall Motor Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Marshall Motor Holdings has current liabilities of UK£619m and total assets of UK£951m. Therefore its current liabilities are equivalent to approximately 65% of its total assets. Marshall Motor Holdings has a relatively high level of current liabilities, boosting its ROCE meaningfully.

The Bottom Line On Marshall Motor Holdings's ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. Marshall Motor Holdings 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 Marshall Motor Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.