Today we are going to look at Fortis Healthcare Limited (NSE:FORTIS) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 Fortis Healthcare:
0.029 = ₹2.6b ÷ (₹114b – ₹26b) (Based on the trailing twelve months to September 2019.)
So, Fortis Healthcare has an ROCE of 2.9%.
Does Fortis Healthcare Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Fortis Healthcare’s ROCE is meaningfully below the Healthcare industry average of 16%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Fortis Healthcare stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Fortis Healthcare delivered an ROCE of 2.9%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can see in the image below how Fortis Healthcare’s ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fortis Healthcare.
Do Fortis 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Fortis Healthcare has total assets of ₹114b and current liabilities of ₹26b. As a result, its current liabilities are equal to approximately 22% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On Fortis Healthcare’s ROCE
Fortis Healthcare has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than Fortis Healthcare. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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