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Why We’re Not Keen On Mediclinic International plc’s (LON:MDC) 4.9% Return On Capital

Simply Wall St

Today we are going to look at Mediclinic International plc (LON:MDC) 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. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?

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 Mediclinic International:

0.049 = UK£332m ÷ (UK£7.3b - UK£586m) (Based on the trailing twelve months to September 2019.)

So, Mediclinic International has an ROCE of 4.9%.

Check out our latest analysis for Mediclinic International

Does Mediclinic International Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Mediclinic International's ROCE appears meaningfully below the 9.2% 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. Setting aside the industry comparison for now, Mediclinic International's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

You can click on the image below to see (in greater detail) how Mediclinic International's past growth compares to other companies.

LSE:MDC Past Revenue and Net Income, November 16th 2019

It is important to remember that ROCE shows past performance, and is 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 Mediclinic International's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Mediclinic International has total liabilities of UK£586m and total assets of UK£7.3b. Therefore its current liabilities are equivalent to approximately 8.0% of its total assets. Mediclinic International has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

What We Can Learn From Mediclinic International's ROCE

If performance improves, then Mediclinic International may be an OK investment, especially at the right valuation. You might be able to find a better investment than Mediclinic International. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.