Is Cantel Medical Corp.’s (NYSE:CMD) Return On Capital Employed Any Good?
Today we'll look at Cantel Medical Corp. (NYSE:CMD) 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, 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.
Understanding 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. Overall, it is a valuable metric that has its flaws. 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 Cantel Medical:
0.079 = US$133m ÷ (US$1.9b - US$204m) (Based on the trailing twelve months to January 2020.)
Therefore, Cantel Medical has an ROCE of 7.9%.
See our latest analysis for Cantel Medical
Does Cantel Medical Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Cantel Medical's ROCE is fairly close to the Medical Equipment industry average of 8.9%. Aside from the industry comparison, Cantel Medical's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, Cantel Medical currently has an ROCE of 7.9%, less than the 17% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Cantel Medical's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Cantel Medical.
Do Cantel Medical'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Cantel Medical has current liabilities of US$204m and total assets of US$1.9b. As a result, its current liabilities are equal to approximately 11% 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 Cantel Medical's ROCE
If Cantel Medical continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Cantel Medical. 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).
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.
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. Thank you for reading.
