How Do medical columbus AG’s (FRA:MCE) Returns On Capital Compare To Peers?

Today we are going to look at medical columbus AG (FRA:MCE) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, 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 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In the end, ROCE is a valuable metric that has its flaws. 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?

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 medical columbus:

0.11 = €621k ÷ (€4.7m - €393k) (Based on the trailing twelve months to June 2018.)

So, medical columbus has an ROCE of 11%.

View our latest analysis for medical columbus

Does medical columbus Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, medical columbus's ROCE appears to be significantly below the 14% average in the Healthcare Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how medical columbus compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

medical columbus's current ROCE of 11% is lower than 3 years ago, when the company reported a 21% ROCE. So investors might consider if it has had issues recently.

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. If medical columbus is cyclical, it could make sense to check out this freegraph of past earnings, revenue and cash flow.

Do medical columbus'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

medical columbus has total liabilities of €393k and total assets of €4.7m. Therefore its current liabilities are equivalent to approximately 8.4% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), medical columbus earns a sound return on capital employed.

The Bottom Line On medical columbus's ROCE

This is good to see, and while better prospects may exist, medical columbus seems worth researching further. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

Of course medical columbus may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.