U.S. Markets close in 1 hr 15 mins

What Can We Make Of Georgia Healthcare Group PLC’s (LON:GHG) High Return On Capital?

Simply Wall St

Today we'll evaluate Georgia Healthcare Group PLC (LON:GHG) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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. 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 Georgia Healthcare Group:

0.089 = GEL101m ÷ (GEL1.3b - GEL220m) (Based on the trailing twelve months to September 2019.)

Therefore, Georgia Healthcare Group has an ROCE of 8.9%.

View our latest analysis for Georgia Healthcare Group

Is Georgia Healthcare Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Georgia Healthcare Group's ROCE appears to be substantially greater than the 6.7% average in the Consumer Retailing industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Georgia Healthcare Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, Georgia Healthcare Group's ROCE appears to be 8.9%, compared to 3 years ago, when its ROCE was 7.1%. This makes us think the business might be improving. You can see in the image below how Georgia Healthcare Group's ROCE compares to its industry. Click to see more on past growth.

LSE:GHG Past Revenue and Net Income, January 24th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Georgia Healthcare Group.

Georgia Healthcare Group's Current Liabilities And Their Impact On 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Georgia Healthcare Group has total assets of GEL1.3b and current liabilities of GEL220m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Georgia Healthcare Group's ROCE

With that in mind, Georgia Healthcare Group's ROCE appears pretty good. Georgia Healthcare Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.