Today we’ll look at medical columbus AG (FRA:MCE) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 medical columbus:
0.11 = €474k ÷ (€4.7m – €393k) (Based on the trailing twelve months to June 2018.)
So, medical columbus has an ROCE of 11%.
Is medical columbus’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see medical columbus’s ROCE is around the 12% average reported by the Healthcare Services industry. Separate from medical columbus’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
medical columbus’s current ROCE of 11% is lower than its ROCE in the past, which was 21%, 3 years ago. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect medical columbus’s 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.
medical columbus has total assets of €4.7m and current liabilities of €393k. Therefore its current liabilities are equivalent to approximately 8.4% of its total assets. With low current liabilities, medical columbus’s decent ROCE looks that much more respectable.
Our Take On medical columbus’s ROCE
If it is able to keep this up, medical columbus could be attractive. Of course you might be able to find a better stock than medical columbus. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.