In This Article:
Today we are going to look at Geratherm Medical AG (ETR:GME) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Geratherm Medical:
0.062 = €1.5m ÷ (€30m - €5.8m) (Based on the trailing twelve months to June 2019.)
So, Geratherm Medical has an ROCE of 6.2%.
View our latest analysis for Geratherm Medical
Is Geratherm Medical's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Geratherm Medical'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. Aside from the industry comparison, Geratherm Medical's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that , Geratherm Medical currently has an ROCE of 6.2%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Geratherm Medical's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. You can check if Geratherm Medical has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.