Do CRH Medical Corporation’s (TSE:CRH) Returns On Capital Employed Make The Cut?
Today we are going to look at CRH Medical Corporation (TSE:CRH) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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 CRH Medical:
0.10 = US$19m ÷ (US$196m - US$9.9m) (Based on the trailing twelve months to September 2019.)
Therefore, CRH Medical has an ROCE of 10%.
Check out our latest analysis for CRH Medical
Is CRH Medical's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see CRH Medical's ROCE is around the 9.0% average reported by the Healthcare industry. Regardless of where CRH Medical sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can click on the image below to see (in greater detail) how CRH Medical'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 CRH Medical.
What Are Current Liabilities, And How Do They Affect CRH Medical's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.
CRH Medical has total assets of US$196m and current liabilities of US$9.9m. As a result, its current liabilities are equal to approximately 5.1% of its total assets. With low current liabilities, CRH Medical's decent ROCE looks that much more respectable.
Our Take On CRH Medical's ROCE
If it is able to keep this up, CRH Medical could be attractive. CRH Medical looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
