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MEDICLIN Aktiengesellschaft’s (ETR:MED) Investment Returns Are Lagging Its Industry

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Today we'll look at MEDICLIN Aktiengesellschaft (ETR:MED) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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'.

How Do You Calculate Return On Capital Employed?

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 MEDICLIN:

0.0066 = €5.0m ÷ (€891m - €136m) (Based on the trailing twelve months to March 2019.)

Therefore, MEDICLIN has an ROCE of 0.7%.

See our latest analysis for MEDICLIN

Is MEDICLIN's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, MEDICLIN's ROCE appears meaningfully below the 7.6% average reported by the Healthcare industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how MEDICLIN compares to its industry, its ROCE in absolute terms is low; especially compared to the ~0.2% available in government bonds. Readers may wish to look for more rewarding investments.

MEDICLIN's current ROCE of 0.7% is lower than 3 years ago, when the company reported a 4.9% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how MEDICLIN's ROCE compares to its industry. Click to see more on past growth.

XTRA:MED Past Revenue and Net Income, July 20th 2019

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, after all, simply a snap shot of a single year. 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 MEDICLIN'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 counter this, investors can check if a company has high current liabilities relative to total assets.

MEDICLIN has total assets of €891m and current liabilities of €136m. As a result, its current liabilities are equal to approximately 15% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On MEDICLIN's ROCE

While that is good to see, MEDICLIN has a low ROCE and does not look attractive in this analysis. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 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. Thank you for reading.