Today we'll look at Athens Medical Center S.A. (ATH:IATR) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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 Athens Medical Center:
0.071 = €16m ÷ (€359m - €135m) (Based on the trailing twelve months to December 2018.)
So, Athens Medical Center has an ROCE of 7.1%.
Check out our latest analysis for Athens Medical Center
Is Athens Medical Center's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Athens Medical Center's ROCE appears to be around the 8.6% average of the Healthcare industry. Putting aside Athens Medical Center'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.
Athens Medical Center reported an ROCE of 7.1% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. You can see in the image below how Athens Medical Center'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 only a point-in-time measure. How cyclical is Athens Medical Center? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Athens Medical Center's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.