Today we'll evaluate Regis Healthcare Limited (ASX:REG) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from 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?

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 Regis Healthcare:

0.13 = AU$74m ÷ (AU$1.8b - AU$1.2b) (Based on the trailing twelve months to June 2019.)

So, Regis Healthcare has an ROCE of 13%.

View our latest analysis for Regis Healthcare

Does Regis Healthcare Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Regis Healthcare's ROCE is meaningfully higher than the 10.0% average in the Healthcare industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Regis Healthcare compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Regis Healthcare's current ROCE of 13% is lower than 3 years ago, when the company reported a 19% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Regis Healthcare'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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Regis Healthcare.