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Today we'll evaluate Q & M Dental Group (Singapore) Limited (SGX:QC7) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 Q & M Dental Group (Singapore):

0.055 = S$12m ÷ (S$235m - S$22m) (Based on the trailing twelve months to March 2019.)

So, Q & M Dental Group (Singapore) has an ROCE of 5.5%.

View our latest analysis for Q & M Dental Group (Singapore)

Is Q & M Dental Group (Singapore)'s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Q & M Dental Group (Singapore)'s ROCE is fairly close to the Healthcare industry average of 5.5%. Setting aside the industry comparison for now, Q & M Dental Group (Singapore)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

As we can see, Q & M Dental Group (Singapore) currently has an ROCE of 5.5%, less than the 9.6% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Q & M Dental Group (Singapore).

Q & M Dental Group (Singapore)'s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Q & M Dental Group (Singapore) has total liabilities of S$22m and total assets of S$235m. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. Q & M Dental Group (Singapore) reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Q & M Dental Group (Singapore)'s ROCE

Q & M Dental Group (Singapore) looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.