Today we are going to look at EuroEyes International Eye Clinic Limited (HKG:1846) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 EuroEyes International Eye Clinic:
0.14 = €6.8m ÷ (€68m - €19m) (Based on the trailing twelve months to March 2019.)
So, EuroEyes International Eye Clinic has an ROCE of 14%.
Does EuroEyes International Eye Clinic Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. EuroEyes International Eye Clinic's ROCE appears to be substantially greater than the 8.3% average in the Healthcare industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from EuroEyes International Eye Clinic's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can see in the image below how EuroEyes International Eye Clinic'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. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect EuroEyes International Eye Clinic's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
EuroEyes International Eye Clinic has total liabilities of €19m and total assets of €68m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From EuroEyes International Eye Clinic's ROCE
This is good to see, and with a sound ROCE, EuroEyes International Eye Clinic could be worth a closer look. EuroEyes International Eye Clinic 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.
EuroEyes International Eye Clinic is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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