Yahoo Finance Is A/S Latvijas Juras medicinas centrs (MUN:UOM) Struggling With Its 0.5% Return On Capital Employed?
Today we'll evaluate A/S Latvijas Juras medicinas centrs (MUN:UOM) 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. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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?
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 A/S Latvijas Juras medicinas centrs:
0.0054 = €35k ÷ (€7.1m - €752k) (Based on the trailing twelve months to December 2018.)
Therefore, A/S Latvijas Juras medicinas centrs has an ROCE of 0.5%.
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Is A/S Latvijas Juras medicinas centrs's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, A/S Latvijas Juras medicinas centrs's ROCE appears to be significantly below the 5.6% average in the Healthcare industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how A/S Latvijas Juras medicinas centrs stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
A/S Latvijas Juras medicinas centrs delivered an ROCE of 0.5%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If A/S Latvijas Juras medicinas centrs is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do A/S Latvijas Juras medicinas centrs's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
A/S Latvijas Juras medicinas centrs has total liabilities of €752k and total assets of €7.1m. As a result, its current liabilities are equal to approximately 11% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On A/S Latvijas Juras medicinas centrs's ROCE
That's not a bad thing, however A/S Latvijas Juras medicinas centrs has a weak ROCE and may not be an attractive investment. Of course, you might also be able to find a better stock than A/S Latvijas Juras medicinas centrs. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
