In This Article:
Today we’ll look at MeVis Medical Solutions AG (FRA:M3V) and reflect on its potential as an investment. 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, we’ll go over how we 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.
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. In general, businesses with a higher ROCE are usually better quality. 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’.
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 MeVis Medical Solutions:
0.21 = €7.2m ÷ (€41m – €5.9m) (Based on the trailing twelve months to December 2018.)
Therefore, MeVis Medical Solutions has an ROCE of 21%.
See our latest analysis for MeVis Medical Solutions
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Does MeVis Medical Solutions Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. MeVis Medical Solutions’s ROCE appears to be substantially greater than the 15% average in the Healthcare Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, MeVis Medical Solutions’s ROCE currently appears to be excellent.
Our data shows that MeVis Medical Solutions currently has an ROCE of 21%, compared to its ROCE of 14% 3 years ago. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for MeVis Medical Solutions.