Today we are going to look at Metlifecare Limited (NZSE:MET) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Metlifecare:
0.0022 = NZ$7.4m ÷ (NZ$3.5b - NZ$167m) (Based on the trailing twelve months to June 2019.)
Therefore, Metlifecare has an ROCE of 0.2%.
Does Metlifecare Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Metlifecare's ROCE appears meaningfully below the 0.9% average reported by the Healthcare industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Metlifecare compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.4% available in government bonds. It is likely that there are more attractive prospects out there.
Metlifecare's current ROCE of 0.2% is lower than 3 years ago, when the company reported a 0.6% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Metlifecare'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Metlifecare.
What Are Current Liabilities, And How Do They Affect Metlifecare's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Metlifecare has total liabilities of NZ$167m and total assets of NZ$3.5b. As a result, its current liabilities are equal to approximately 4.7% of its total assets. With barely any current liabilities, there is minimal impact on Metlifecare's admittedly low ROCE.
Our Take On Metlifecare's ROCE
Still, investors could probably find more attractive prospects with better performance out there. 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).
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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 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. Thank you for reading.