In This Article:
Today we'll evaluate Monash IVF Group Limited (ASX:MVF) to determine whether it could have potential as an investment idea. 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. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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?
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 Monash IVF Group:
0.12 = AU$33m ÷ (AU$290m - AU$24m) (Based on the trailing twelve months to June 2019.)
Therefore, Monash IVF Group has an ROCE of 12%.
View our latest analysis for Monash IVF Group
Is Monash IVF Group's ROCE Good?
One way to assess ROCE is to compare similar companies. Monash IVF Group's ROCE appears to be substantially greater than the 10.0% average in the Healthcare 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. Separate from Monash IVF Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Monash IVF Group currently has an ROCE of 12%, less than the 18% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Monash IVF Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 Monash IVF Group.