Evaluating Centene Corporation’s (NYSE:CNC) Investments In Its Business

Today we'll look at Centene Corporation (NYSE:CNC) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.

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 Centene:

0.12 = US$2.6b ÷ (US$34b - US$13b) (Based on the trailing twelve months to September 2019.)

So, Centene has an ROCE of 12%.

View our latest analysis for Centene

Is Centene's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Centene's ROCE is fairly close to the Healthcare industry average of 11%. Regardless of where Centene sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Take a look at the image below to see how Centene's past growth compares to the average in its industry.

When considering this metric, keep in mind that it is backwards looking, and 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Centene.

Centene's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Centene has total assets of US$34b and current liabilities of US$13b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. Centene has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From Centene's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Centene shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Centene 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.