Tivity Health, Inc. (NASDAQ:TVTY) Earns Among The Best Returns In Its Industry
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Today we'll look at Tivity Health, Inc. (NASDAQ:TVTY) 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Tivity Health:
0.34 = US$137m ÷ (US$482m - US$81m) (Based on the trailing twelve months to December 2018.)
Therefore, Tivity Health has an ROCE of 34%.
Check out our latest analysis for Tivity Health
Does Tivity Health Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Tivity Health's ROCE is meaningfully higher than the 13% average in the Healthcare industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Tivity Health's ROCE in absolute terms currently looks quite high.
As we can see, Tivity Health currently has an ROCE of 34% compared to its ROCE 3 years ago, which was 17%. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. 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 Tivity Health.
Do Tivity Health's Current Liabilities Skew Its 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.
Tivity Health has total assets of US$482m and current liabilities of US$81m. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On Tivity Health's ROCE
This is good to see, and with such a high ROCE, Tivity Health may be worth a closer look. Of course you might be able to find a better stock than Tivity Health. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will 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 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.
