Today we’ll evaluate M1 Kliniken AG (ETR:M12) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we 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 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 M1 Kliniken:
0.095 = €7.6m ÷ (€85m – €5.5m) (Based on the trailing twelve months to June 2019.)
Therefore, M1 Kliniken has an ROCE of 9.5%.
Does M1 Kliniken Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that M1 Kliniken’s ROCE is fairly close to the Healthcare industry average of 8.6%. Regardless of where M1 Kliniken sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
M1 Kliniken’s current ROCE of 9.5% is lower than 3 years ago, when the company reported a 35% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how M1 Kliniken’s ROCE compares to its industry.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do M1 Kliniken’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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
M1 Kliniken has total liabilities of €5.5m and total assets of €85m. As a result, its current liabilities are equal to approximately 6.5% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), M1 Kliniken earns a sound return on capital employed.
Our Take On M1 Kliniken’s ROCE
If it is able to keep this up, M1 Kliniken could be attractive. M1 Kliniken 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 M1 Kliniken 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 firstname.lastname@example.org. 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.