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Here’s What Universal Health Services, Inc.’s (NYSE:UHS) Return On Capital Can Tell Us

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Today we’ll evaluate Universal Health Services, Inc. (NYSE:UHS) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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. Generally speaking a higher ROCE is better. 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 Universal Health Services:

0.13 = US$1.3b ÷ (US$11b – US$1.8b) (Based on the trailing twelve months to September 2018.)

Therefore, Universal Health Services has an ROCE of 13%.

See our latest analysis for Universal Health Services

Is Universal Health Services’s ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that Universal Health Services’s ROCE is fairly close to the Healthcare industry average of 13%. Separate from Universal Health Services’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

NYSE:UHS Last Perf February 18th 19
NYSE:UHS Last Perf February 18th 19

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Universal Health Services.

What Are Current Liabilities, And How Do They Affect Universal Health Services’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Universal Health Services has total assets of US$11b and current liabilities of US$1.8b. As a result, its current liabilities are equal to approximately 16% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Universal Health Services’s ROCE

Overall, Universal Health Services has a decent ROCE and could be worthy of further research. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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. On rare occasion, data errors may occur. Thank you for reading.

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