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Here’s why Omnicell, Inc.’s (NASDAQ:OMCL) Returns On Capital Matters So Much

Simply Wall St

Today we are going to look at Omnicell, Inc. (NASDAQ:OMCL) 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. 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 Omnicell:

0.051 = US$44m ÷ (US$1.1b - US$205m) (Based on the trailing twelve months to December 2018.)

Therefore, Omnicell has an ROCE of 5.1%.

See our latest analysis for Omnicell

Does Omnicell Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Omnicell's ROCE is meaningfully below the Healthcare Services industry average of 7.7%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Omnicell stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

As we can see, Omnicell currently has an ROCE of 5.1%, less than the 11% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

NasdaqGS:OMCL Past Revenue and Net Income, April 16th 2019

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

Omnicell's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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.

Omnicell has total liabilities of US$205m and total assets of US$1.1b. As a result, its current liabilities are equal to approximately 19% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On Omnicell's ROCE

Omnicell has a poor ROCE, and there may be better investment prospects 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).

I will like Omnicell better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.