Today we'll look at Vail Resorts, Inc. (NYSE:MTN) 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. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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 Vail Resorts:
0.12 = US$482m ÷ (US$5.2b - US$972m) (Based on the trailing twelve months to October 2019.)
So, Vail Resorts has an ROCE of 12%.
Does Vail Resorts Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Vail Resorts's ROCE is meaningfully better than the 8.5% average in the Hospitality 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 Vail Resorts compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Vail Resorts currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 8.6%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Vail Resorts's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Vail Resorts's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Vail Resorts has total assets of US$5.2b and current liabilities of US$972m. As a result, its current liabilities are equal to approximately 19% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Vail Resorts's ROCE
This is good to see, and with a sound ROCE, Vail Resorts could be worth a closer look. Vail Resorts 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.
I will like Vail Resorts better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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