Yahoo Finance Why We Like Medica Group Plc’s (LON:MGP) 22% Return On Capital Employed
Today we'll look at Medica Group Plc (LON:MGP) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the 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?
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 Medica Group:
0.22 = UK£10.0m ÷ (UK£50m - UK£3.8m) (Based on the trailing twelve months to June 2019.)
Therefore, Medica Group has an ROCE of 22%.
Check out our latest analysis for Medica Group
Is Medica Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Medica Group's ROCE is meaningfully better than the 9.8% average in the Healthcare industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Medica Group's ROCE is currently very good.
You can click on the image below to see (in greater detail) how Medica Group's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Medica Group's 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.
Medica Group has total liabilities of UK£3.8m and total assets of UK£50m. Therefore its current liabilities are equivalent to approximately 7.7% of its total assets. Minimal current liabilities are not distorting Medica Group's impressive ROCE.
The Bottom Line On Medica Group's ROCE
This should mark the company as worthy of further investigation. There might be better investments than Medica Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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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.