Today we'll evaluate Miller Industries, Inc. (NYSE:MLR) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Ultimately, it is a useful but imperfect metric. 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 Miller Industries:
0.19 = US$49m ÷ (US$401m - US$140m) (Based on the trailing twelve months to September 2019.)
Therefore, Miller Industries has an ROCE of 19%.
Is Miller Industries's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Miller Industries's ROCE is meaningfully better than the 11% average in the Machinery industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Miller Industries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Miller Industries currently has an ROCE of 19%, compared to its ROCE of 15% 3 years ago. This makes us think the business might be improving. You can see in the image below how Miller Industries'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 only a point-in-time measure. How cyclical is Miller Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Miller Industries'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Miller Industries has total assets of US$401m and current liabilities of US$140m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. With this level of current liabilities, Miller Industries's ROCE is boosted somewhat.
Our Take On Miller Industries's ROCE
Miller Industries's ROCE does look good, but the level of current liabilities also contribute to that. Miller Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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