Yahoo Finance Should You Like Georgia Healthcare Group PLC’s (LON:GHG) High Return On Capital Employed?
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Today we'll evaluate Georgia Healthcare Group PLC (LON:GHG) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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.'
How Do You Calculate Return On Capital Employed?
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 Georgia Healthcare Group:
0.091 = GEL101m ÷ (GEL1.3b - GEL233m) (Based on the trailing twelve months to March 2019.)
Therefore, Georgia Healthcare Group has an ROCE of 9.1%.
See our latest analysis for Georgia Healthcare Group
Is Georgia Healthcare Group's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Georgia Healthcare Group's ROCE is meaningfully better than the 7.4% average in the Consumer Retailing industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Georgia Healthcare Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Our data shows that Georgia Healthcare Group currently has an ROCE of 9.1%, compared to its ROCE of 7.0% 3 years ago. This makes us think the business might be improving.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Georgia Healthcare Group.
Do Georgia Healthcare Group's Current Liabilities Skew 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Georgia Healthcare Group has total liabilities of GEL233m and total assets of GEL1.3b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
The Bottom Line On Georgia Healthcare Group's ROCE
If Georgia Healthcare Group continues to earn an uninspiring ROCE, there may be better places to invest. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
