Today we are going to look at AMN Healthcare Services, Inc. (NYSE:AMN) 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.
First of all, we'll work out how to 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.
Return On Capital Employed (ROCE): What is it?
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. Ultimately, it is a useful but imperfect metric. 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 AMN Healthcare Services:
0.12 = US$181m ÷ (US$1.9b - US$344m) (Based on the trailing twelve months to September 2019.)
Therefore, AMN Healthcare Services has an ROCE of 12%.
Does AMN Healthcare Services Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see AMN Healthcare Services's ROCE is around the 11% average reported by the Healthcare industry. Separate from AMN Healthcare Services's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
AMN Healthcare Services's current ROCE of 12% is lower than 3 years ago, when the company reported a 20% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how AMN Healthcare Services'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 AMN Healthcare Services.
AMN Healthcare Services's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
AMN Healthcare Services has total assets of US$1.9b and current liabilities of US$344m. Therefore its current liabilities are equivalent to approximately 18% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On AMN Healthcare Services's ROCE
With that in mind, AMN Healthcare Services's ROCE appears pretty good. There might be better investments than AMN Healthcare Services 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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