Don’t Buy Monro, Inc. (NASDAQ:MNRO) Until You Understand Its ROCE

Today we are going to look at Monro, Inc. (NASDAQ:MNRO) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?

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 Monro:

0.10 = US$137m ÷ (US$1.6b – US$264m) (Based on the trailing twelve months to June 2019.)

So, Monro has an ROCE of 10%.

View our latest analysis for Monro

Is Monro’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Monro’s ROCE appears to be around the 10% average of the Specialty Retail industry. Aside from the industry comparison, Monro’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

You can click on the image below to see (in greater detail) how Monro’s past growth compares to other companies.

NasdaqGS:MNRO Past Revenue and Net Income, October 21st 2019
NasdaqGS:MNRO Past Revenue and Net Income, October 21st 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Monro.

How Monro’s Current Liabilities Impact Its 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Monro has total liabilities of US$264m and total assets of US$1.6b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Monro’s ROCE

That said, Monro’s ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Monro. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Monro better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.