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# CarMax ROC %

: 4.21% (As of Aug. 2020)
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ROC % measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called ROIC %. CarMax's annualized return on capital (ROC %) for the quarter that ended in Aug. 2020 was 4.21%.

As of today (2020-09-29), CarMax's WACC % is 5.81%. CarMax's ROC % is 2.23% (calculated using TTM income statement data). CarMax earns returns that do not match up to its cost of capital. It will destroy value as it grows.

## CarMax ROC % Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

 CarMax Annual Data Feb11 Feb12 Feb13 Feb14 Feb15 Feb16 Feb17 Feb18 Feb19 Feb20 ROC %     3.14 2.96 2.77 3.30 3.17

## CarMax ROC % Calculation

CarMax's annualized Return on Capital (ROC %) for the fiscal year that ended in Feb. 2020 is calculated as:

 ROC % (A: Feb. 2020 ) = NOPAT / Average Invested Capital = Operating Income * ( 1 - Tax Rate % ) / ( (Invested Capital (A: Feb. 2019 ) + Invested Capital (A: Feb. 2020 )) / count ) = 782.273 * ( 1 - 23.48% ) / ( (17755.77 + 19953.7) / 2 ) = 598.5952996 / 18854.735 = 3.17 %

where

 Invested Capital (A: Feb. 2019 ) = Total Assets - Accounts Payable & Accrued Expense - Excess Cash = Total Assets - Accounts Payable & Accrued Expense - ( Cash, Cash Equivalents, Marketable Securities - max(0, Total Current Liabilities - Total Current Assets + Cash, Cash Equivalents, Marketable Securities )) = 18717.867 - 915.159 - ( 46.938 - max(0, 1311.509 - 3214.013 + 46.938 )) = 17755.77

 Invested Capital (A: Feb. 2020 ) = Total Assets - Accounts Payable & Accrued Expense - Excess Cash = Total Assets - Accounts Payable & Accrued Expense - ( Cash, Cash Equivalents, Marketable Securities - max(0, Total Current Liabilities - Total Current Assets + Cash, Cash Equivalents, Marketable Securities )) = 21082.182 - 1070.271 - ( 58.211 - max(0, 1534.707 - 3663.687 + 58.211 )) = 19953.7

CarMax's annualized Return on Capital (ROC %) for the quarter that ended in Aug. 2020 is calculated as:

 ROC % (Q: Aug. 2020 ) = NOPAT / Average Invested Capital = Operating Income * ( 1 - Tax Rate % ) / ( (Invested Capital (Q: May. 2020 ) + Invested Capital (Q: Aug. 2020 )) / count ) = 1047.74 * ( 1 - 23.6% ) / ( (18634.27 + 19436.111) / 2 ) = 800.47336 / 19035.1905 = 4.21 %

where

 Invested Capital (Q: May. 2020 ) = Total Assets - Accounts Payable & Accrued Expense - Excess Cash = Total Assets - Accounts Payable & Accrued Expense - ( Cash, Cash Equivalents, Marketable Securities - max(0, Total Current Liabilities - Total Current Assets + Cash, Cash Equivalents, Marketable Securities )) = 19972.532 - 680.24 - ( 658.022 - max(0, 1151.006 - 3283.731 + 658.022 )) = 18634.27

 Invested Capital (Q: Aug. 2020 ) = Total Assets - Accounts Payable & Accrued Expense - Excess Cash = Total Assets - Accounts Payable & Accrued Expense - ( Cash, Cash Equivalents, Marketable Securities - max(0, Total Current Liabilities - Total Current Assets + Cash, Cash Equivalents, Marketable Securities )) = 21246.306 - 1098.634 - ( 711.561 - max(0, 1598.942 - 4327.859 + 711.561 )) = 19436.111

Note: The Operating Income data used here is four times the quarterly (Aug. 2020) data.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

CarMax  (NYSE:KMX) ROC % Explanation

ROC % measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called ROIC %. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income or EBIT rather than net income in the numerator. The second is the tax adjustment to this operating income or EBIT, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income or EBIT is the current year's number.

Why is ROC % important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, CarMax's WACC % is 5.81%. CarMax's ROC % is 2.23% (calculated using TTM income statement data). CarMax earns returns that do not match up to its cost of capital. It will destroy value as it grows.

Be Aware

Like ROE % and ROA %, ROC % is calculated with only 12 months of data. Fluctuations in the company's earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.