PW Medtech Group Limited (HKG:1358) Might Not Be A Great Investment
Today we'll look at PW Medtech Group Limited (HKG:1358) and reflect on its potential as an investment. 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. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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'.
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 PW Medtech Group:
0.0088 = CN¥41m ÷ (CN¥5.4b - CN¥722m) (Based on the trailing twelve months to December 2019.)
So, PW Medtech Group has an ROCE of 0.9%.
View our latest analysis for PW Medtech Group
Is PW Medtech Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, PW Medtech Group's ROCE appears meaningfully below the 11% average reported by the Medical Equipment industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside PW Medtech Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
We can see that, PW Medtech Group currently has an ROCE of 0.9%, less than the 4.9% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how PW Medtech Group's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is PW Medtech Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect PW Medtech Group's 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.
PW Medtech Group has total assets of CN¥5.4b and current liabilities of CN¥722m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On PW Medtech Group's ROCE
PW Medtech Group has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than PW Medtech Group. 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.
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.
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. Thank you for reading.
