Today we’ll look at WellCare Health Plans, Inc. (NYSE:WCG) and reflect on its potential as an investment. 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.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
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 WellCare Health Plans:
0.11 = US$581m ÷ (US$12b – US$5.8b) (Based on the trailing twelve months to September 2018.)
So, WellCare Health Plans has an ROCE of 11%.
Is WellCare Health Plans’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see WellCare Health Plans’s ROCE is around the 13% average reported by the Healthcare industry. Setting aside the industry comparison for now, WellCare Health Plans’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
WellCare Health Plans’s current ROCE of 11% is lower than 3 years ago, when the company reported a 16% ROCE. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for WellCare Health Plans.
WellCare Health Plans’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
WellCare Health Plans has total liabilities of US$5.8b and total assets of US$12b. As a result, its current liabilities are equal to approximately 47% of its total assets. WellCare Health Plans’s middling level of current liabilities have the effect of boosting its ROCE a bit.
Our Take On WellCare Health Plans’s ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. A good or bad ROCE tells us something about a business, but we need to do more research before making a purchase. One data point to check is if insiders have bought shares recently.
If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity 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 firstname.lastname@example.org.