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Should Danaher Corporation’s (NYSE:DHR) Weak Investment Returns Worry You?

Today we'll look at Danaher Corporation (NYSE:DHR) 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. 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.

What is Return On Capital Employed (ROCE)?

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. In brief, it is a useful tool, but it is not without drawbacks. 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Danaher:

0.073 = US$3.5b ÷ (US$53b - US$5.0b) (Based on the trailing twelve months to June 2019.)

So, Danaher has an ROCE of 7.3%.

View our latest analysis for Danaher

Does Danaher Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Danaher's ROCE appears to be significantly below the 10% average in the Medical Equipment industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Danaher'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.

The image below shows how Danaher's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:DHR Past Revenue and Net Income, August 30th 2019
NYSE:DHR Past Revenue and Net Income, August 30th 2019

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. 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 Danaher.

Danaher's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Danaher has total liabilities of US$5.0b and total assets of US$53b. As a result, its current liabilities are equal to approximately 9.4% of its total assets. With low levels of current liabilities, at least Danaher's mediocre ROCE is not unduly boosted.

The Bottom Line On Danaher's ROCE

Based on this information, Danaher appears to be a mediocre business. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.