This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Mobile Mini Inc (NASDAQ:MINI).
Purchasing Mobile Mini gives you an ownership stake in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Mobile Mini, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Mobile Mini is good at growing investor capital. I have calculated Mobile Mini’s ROCE for you below:
ROCE Calculation for MINI
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$95m ÷ (US$2.0b – US$115m) = 7.1%
The calculation above shows that MINI’s earnings were 7.1% of capital employed. Comparing this to a healthy 15% benchmark shows Mobile Mini is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.
Why is this the case?
Mobile Mini’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Mobile Mini is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of MINI’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that MINI’s ROCE has increased from 6.6%. Similarly, the movement in the earnings variable shows a jump from US$91m to US$95m whilst capital employed has deteriorated due to a decreased level of total assets and a larger reliance on current liabilities (increased borrowing to fund operations) , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.
Although Mobile Mini’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate MINI or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for MINI’s future growth? Take a look at our free research report of analyst consensus for MINI’s outlook.
- Valuation: What is MINI worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether MINI is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.