Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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’.” data-reactid=”31″>ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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’.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)” data-reactid=”34″>Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Azure Healthcare:
0.099 = AU$1.5m ÷ (AU$23m – AU$8.0m) (Based on the trailing twelve months to December 2019.)
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="So, Azure Healthcare has an ROCE of 9.9%. ” data-reactid=”37″>So, Azure Healthcare has an ROCE of 9.9%.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" Check out our latest analysis for Azure Healthcare ” data-reactid=”38″> Check out our latest analysis for Azure Healthcare
Does Azure Healthcare Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Azure Healthcare’s ROCE appears to be around the 11% average of the Medical Equipment industry. Independently of how Azure Healthcare compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Azure Healthcare delivered an ROCE of 9.9%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. The image below shows how Azure Healthcare’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. If Azure Healthcare is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.” data-reactid=”54″>Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. If Azure Healthcare is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Azure Healthcare’s Current Liabilities Skew 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Azure Healthcare has current liabilities of AU$8.0m and total assets of AU$23m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. With this level of current liabilities, Azure Healthcare’s ROCE is boosted somewhat.
The Bottom Line On Azure Healthcare’s ROCE
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Azure Healthcare 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.” data-reactid=”59″>With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Azure Healthcare 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.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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. Thank you for reading.” data-reactid=”65″>If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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. Thank you for reading.
