Should You Like Union Medical Healthcare Limited’s (HKG:2138) High Return On Capital Employed?
Today we are going to look at Union Medical Healthcare Limited (HKG:2138) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 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. 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 Union Medical Healthcare:
0.28 = HK$439m ÷ (HK$2.5b - HK$944m) (Based on the trailing twelve months to September 2019.)
So, Union Medical Healthcare has an ROCE of 28%.
View our latest analysis for Union Medical Healthcare
Is Union Medical Healthcare's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Union Medical Healthcare's ROCE is meaningfully better than the 11% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Union Medical Healthcare's ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how Union Medical Healthcare's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Union Medical Healthcare'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 counter this, investors can check if a company has high current liabilities relative to total assets.
Union Medical Healthcare has total assets of HK$2.5b and current liabilities of HK$944m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. A medium level of current liabilities boosts Union Medical Healthcare's ROCE somewhat.
Our Take On Union Medical Healthcare's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Union Medical Healthcare looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
