Today we'll evaluate Molina Healthcare, Inc. (NYSE:MOH) to determine whether it could have potential as an investment idea. 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. And finally, we'll look at how its current liabilities are impacting 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 Molina Healthcare:
0.34 = US$1.1b ÷ (US$6.7b - US$3.3b) (Based on the trailing twelve months to September 2019.)
Therefore, Molina Healthcare has an ROCE of 34%.
Is Molina Healthcare's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Molina Healthcare's ROCE is meaningfully better than the 11% average in the Healthcare industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Molina Healthcare's ROCE is currently very good.
In our analysis, Molina Healthcare's ROCE appears to be 34%, compared to 3 years ago, when its ROCE was 13%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Molina Healthcare's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Molina Healthcare's Current Liabilities Impact 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 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.
Molina Healthcare has total assets of US$6.7b and current liabilities of US$3.3b. As a result, its current liabilities are equal to approximately 49% of its total assets. Molina Healthcare's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Molina Healthcare's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Molina Healthcare 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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