Today we'll look at CompuGroup Medical Societas Europaea (ETR:COP) 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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?
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:
0.16 = €117m ÷ (€952m - €241m) (Based on the trailing twelve months to June 2019.)
Therefore, CompuGroup Medical Societas Europaea has an ROCE of 16%.
Is CompuGroup Medical Societas Europaea's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, CompuGroup Medical Societas Europaea's ROCE appears to be around the 16% average of the Healthcare Services industry. Independently of how CompuGroup Medical Societas Europaea compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, CompuGroup Medical Societas Europaea's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 12%. This makes us think the business might be improving. The image below shows how CompuGroup Medical Societas Europaea's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
CompuGroup Medical Societas Europaea's Current Liabilities And Their Impact On 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
CompuGroup Medical Societas Europaea has total liabilities of €241m and total assets of €952m. As a result, its current liabilities are equal to approximately 25% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On CompuGroup Medical Societas Europaea's ROCE
This is good to see, and with a sound ROCE, CompuGroup Medical Societas Europaea could be worth a closer look. 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.