Marshall Motor Holdings Plc’s (LON:MMH) Investment Returns Are Lagging Its Industry – Simply Wall St

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Today we are going to look at Marshall Motor Holdings Plc (LON:MMH) to see whether it might be an attractive investment prospect. 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 of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?

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 Marshall Motor Holdings:

0.14 = UK£32m ÷ (UK£736m – UK£504m) (Based on the trailing twelve months to December 2018.)

So, Marshall Motor Holdings has an ROCE of 14%.

See our latest analysis for Marshall Motor Holdings

Does Marshall Motor Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Marshall Motor Holdings’s ROCE is meaningfully below the Specialty Retail industry average of 17%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from Marshall Motor Holdings’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, Marshall Motor Holdings’s ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 11%. This makes us wonder if the company is improving.

AIM:MMH Past Revenue and Net Income, July 1st 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

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

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Marshall Motor Holdings has total assets of UK£736m and current liabilities of UK£504m. As a result, its current liabilities are equal to approximately 68% of its total assets. Marshall Motor Holdings has a relatively high level of current liabilities, boosting its ROCE meaningfully.

What We Can Learn From Marshall Motor Holdings’s ROCE

This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. There might be better investments than Marshall Motor Holdings 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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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.

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. Thank you for reading.

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