Why We Like MasterCraft Boat Holdings, Inc.’s (NASDAQ:MCFT) 37% Return On Capital Employed

Simply Wall St

Today we are going to look at MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. Overall, it is a valuable metric that has its flaws. 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 MasterCraft Boat Holdings:

0.37 = US$66m ÷ (US$249m - US$69m) (Based on the trailing twelve months to June 2019.)

So, MasterCraft Boat Holdings has an ROCE of 37%.

View our latest analysis for MasterCraft Boat Holdings

Is MasterCraft Boat Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. MasterCraft Boat Holdings's ROCE appears to be substantially greater than the 17% average in the Leisure 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, MasterCraft Boat Holdings's ROCE currently appears to be excellent.

MasterCraft Boat Holdings's current ROCE of 37% is lower than 3 years ago, when the company reported a 62% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how MasterCraft Boat Holdings's ROCE compares to its industry. Click to see more on past growth.

NasdaqGM:MCFT Past Revenue and Net Income, October 15th 2019
NasdaqGM:MCFT Past Revenue and Net Income, October 15th 2019

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for MasterCraft Boat Holdings.

MasterCraft Boat Holdings'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.

MasterCraft Boat Holdings has total liabilities of US$69m and total assets of US$249m. Therefore its current liabilities are equivalent to approximately 28% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

Our Take On MasterCraft Boat Holdings's ROCE

Low current liabilities and high ROCE is a good combination, making MasterCraft Boat Holdings look quite interesting. There might be better investments than MasterCraft Boat 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.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.