Here's What Marshalls plc's (LON:MSLH) ROCE Can Tell Us
Today we'll evaluate Marshalls plc (LON:MSLH) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. 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?
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 Marshalls:
0.19 = UK£74m ÷ (UK£563m - UK£162m) (Based on the trailing twelve months to December 2019.)
So, Marshalls has an ROCE of 19%.
Check out our latest analysis for Marshalls
Is Marshalls's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Marshalls's ROCE is meaningfully better than the 14% average in the Basic Materials industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Marshalls's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Marshalls's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Marshalls.
Do Marshalls's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Marshalls has total assets of UK£563m and current liabilities of UK£162m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On Marshalls's ROCE
Low current liabilities and high ROCE is a good combination, making Marshalls look quite interesting. There might be better investments than Marshalls 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.
Marshalls is not the only stock insiders are buying. So take a peek at this free list of growing companies with 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.
