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Here’s What CompuGroup Medical Societas Europaea’s (ETR:COP) Return On Capital Can Tell Us

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Simply Wall St
·4-min read
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Today we are going to look at CompuGroup Medical Societas Europaea (ETR:COP) 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.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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. In general, businesses with a higher ROCE are usually better quality. 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.

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 CompuGroup Medical Societas Europaea:

0.14 = €120m ÷ (€1.0b - €218m) (Based on the trailing twelve months to December 2019.)

Therefore, CompuGroup Medical Societas Europaea has an ROCE of 14%.

Check out our latest analysis for CompuGroup Medical Societas Europaea

Does CompuGroup Medical Societas Europaea Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, CompuGroup Medical Societas Europaea's ROCE appears to be around the 16% average of the Healthcare Services industry. Separate from CompuGroup Medical Societas Europaea's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can click on the image below to see (in greater detail) how CompuGroup Medical Societas Europaea's past growth compares to other companies.

XTRA:COP Past Revenue and Net Income, February 25th 2020
XTRA:COP Past Revenue and Net Income, February 25th 2020

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. 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 CompuGroup Medical Societas Europaea.

What Are Current Liabilities, And How Do They Affect CompuGroup Medical Societas Europaea's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

CompuGroup Medical Societas Europaea has current liabilities of €218m and total assets of €1.0b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On CompuGroup Medical Societas Europaea's ROCE

With that in mind, CompuGroup Medical Societas Europaea's ROCE appears pretty good. CompuGroup Medical Societas Europaea shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.