Today we'll look at DaVita Inc. (NYSE:DVA) and reflect on its potential as an investment. 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. 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 DaVita:
0.11 = US$1.5b ÷ (US$20b - US$5.7b) (Based on the trailing twelve months to June 2019.)
Therefore, DaVita has an ROCE of 11%.
Does DaVita Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, DaVita's ROCE appears to be around the 11% average of the Healthcare industry. Setting aside the industry comparison for now, DaVita's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how DaVita's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 DaVita.
What Are Current Liabilities, And How Do They Affect DaVita's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.
DaVita has total assets of US$20b and current liabilities of US$5.7b. As a result, its current liabilities are equal to approximately 29% 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 DaVita's ROCE
With that in mind, we're not overly impressed with DaVita's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than DaVita. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like DaVita better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 firstname.lastname@example.org. 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.