Is Magellan Health, Inc. (NASDAQ:MGLN) Investing Your Capital Efficiently?
Today we are going to look at Magellan Health, Inc. (NASDAQ:MGLN) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Magellan Health:
0.071 = US$176m ÷ (US$3.0b – US$919m) (Based on the trailing twelve months to September 2018.)
So, Magellan Health has an ROCE of 7.1%.
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Does Magellan Health Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Magellan Health’s ROCE is meaningfully below the Healthcare industry average of 13%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Magellan Health stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Magellan Health’s current ROCE of 7.1% is lower than 3 years ago, when the company reported a 9.9% ROCE. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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 Magellan Health.
Magellan Health’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. 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.
Magellan Health has total assets of US$3.0b and current liabilities of US$919m. As a result, its current liabilities are equal to approximately 30% of its total assets. Magellan Health has a medium level of current liabilities, which would boost its ROCE somewhat.
The Bottom Line On Magellan Health’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better buy than Magellan Health. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
