Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) Is Employing Capital Very Effectively

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Today we are going to look at Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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.’

How Do You Calculate Return On Capital Employed?

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 Fisher & Paykel Healthcare:

0.34 = NZ$293m ÷ (NZ$1.0b – NZ$196m) (Based on the trailing twelve months to March 2019.)

Therefore, Fisher & Paykel Healthcare has an ROCE of 34%.

View our latest analysis for Fisher & Paykel Healthcare

Is Fisher & Paykel Healthcare’s ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Fisher & Paykel Healthcare’s ROCE is meaningfully higher than the 15% average in the Medical Equipment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Fisher & Paykel Healthcare’s ROCE currently appears to be excellent.

NZSE:FPH Past Revenue and Net Income, May 28th 2019
NZSE:FPH Past Revenue and Net Income, May 28th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Fisher & Paykel Healthcare.

Do Fisher & Paykel Healthcare’s Current Liabilities Skew 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.

Fisher & Paykel Healthcare has total liabilities of NZ$196m and total assets of NZ$1.0b. Therefore its current liabilities are equivalent to approximately 19% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.

The Bottom Line On Fisher & Paykel Healthcare’s ROCE

This is good to see, and with such a high ROCE, Fisher & Paykel Healthcare may be worth a closer look. Fisher & Paykel Healthcare looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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 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.