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Today we'll evaluate Garofalo Health Care S.p.A. (BIT:GHC) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 Garofalo Health Care:
0.093 = €22m ÷ (€289m - €57m) (Based on the trailing twelve months to December 2018.)
Therefore, Garofalo Health Care has an ROCE of 9.3%.
View our latest analysis for Garofalo Health Care
Is Garofalo Health Care's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that Garofalo Health Care's ROCE is meaningfully better than the 7.1% average in the Healthcare industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from how Garofalo Health Care stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
The image below shows how Garofalo Health Care's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Garofalo Health Care.