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Today we are going to look at Medifast, Inc. (NYSE:MED) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Medifast:
0.59 = US$79m ÷ (US$210m - US$77m) (Based on the trailing twelve months to March 2019.)
Therefore, Medifast has an ROCE of 59%.
Is Medifast's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Medifast's ROCE is meaningfully better than the 19% average in the Personal Products 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, Medifast's ROCE is currently very good.
Our data shows that Medifast currently has an ROCE of 59%, compared to its ROCE of 32% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Medifast's ROCE compares to its industry. Click to see more on 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Medifast.
What Are Current Liabilities, And How Do They Affect Medifast's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Medifast has total assets of US$210m and current liabilities of US$77m. Therefore its current liabilities are equivalent to approximately 37% of its total assets. Medifast's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Medifast's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Medifast 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.
If you are like me, then you will 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 email@example.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.