Why Speedway Motorsports, Inc.’s (NYSE:TRK) Return On Capital Employed Might Be A Concern

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Today we’ll evaluate Speedway Motorsports, Inc. (NYSE:TRK) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Speedway Motorsports:

0.06 = US$70m ÷ (US$1.5b – US$79m) (Based on the trailing twelve months to September 2018.)

Therefore, Speedway Motorsports has an ROCE of 6.0%.

See our latest analysis for Speedway Motorsports

Is Speedway Motorsports’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Speedway Motorsports’s ROCE appears to be significantly below the 9.7% average in the Hospitality industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Speedway Motorsports stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

NYSE:TRK Last Perf February 6th 19
NYSE:TRK Last Perf February 6th 19

It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Speedway Motorsports.

What Are Current Liabilities, And How Do They Affect Speedway Motorsports’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Speedway Motorsports has total assets of US$1.5b and current liabilities of US$79m. Therefore its current liabilities are equivalent to approximately 5.4% of its total assets. Speedway Motorsports has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

Our Take On Speedway Motorsports’s ROCE

Based on this information, Speedway Motorsports appears to be a mediocre business. But note: Speedway Motorsports may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 editorial-team@simplywallst.com.