Today we are going to look at MarineMax, Inc. (NYSE:HZO) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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.
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 MarineMax:
0.17 = US$63m ÷ (US$755m - US$383m) (Based on the trailing twelve months to June 2019.)
Therefore, MarineMax has an ROCE of 17%.
Is MarineMax's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, MarineMax's ROCE is meaningfully higher than the 10% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from MarineMax's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, MarineMax currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 12%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how MarineMax's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 MarineMax.
What Are Current Liabilities, And How Do They Affect MarineMax's 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.
MarineMax has total liabilities of US$383m and total assets of US$755m. Therefore its current liabilities are equivalent to approximately 51% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On MarineMax's ROCE
While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than MarineMax 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.