Yahoo Finance Is Inspiration Healthcare Group plc’s (LON:IHC) 22% ROCE Any Good?
Today we are going to look at Inspiration Healthcare Group plc (LON:IHC) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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 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. 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 Inspiration Healthcare Group:
0.22 = UK£1.2m ÷ (UK£8.2m - UK£2.5m) (Based on the trailing twelve months to January 2019.)
So, Inspiration Healthcare Group has an ROCE of 22%.
View our latest analysis for Inspiration Healthcare Group
Does Inspiration Healthcare Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Inspiration Healthcare Group's ROCE is meaningfully better than the 11% average in the Medical Equipment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Inspiration Healthcare Group's ROCE currently appears to be excellent.
We can see that, Inspiration Healthcare Group currently has an ROCE of 22% compared to its ROCE 3 years ago, which was 17%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Inspiration Healthcare Group's past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Inspiration Healthcare Group.
What Are Current Liabilities, And How Do They Affect Inspiration Healthcare Group's 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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Inspiration Healthcare Group has total liabilities of UK£2.5m and total assets of UK£8.2m. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Inspiration Healthcare Group has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On Inspiration Healthcare Group's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Inspiration Healthcare Group 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.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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.
