In This Article:
Today we'll look at Paragon Care Limited (ASX:PGC) and reflect on its potential as an investment. 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. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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'.
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 Paragon Care:
0.043 = AU$14m ÷ (AU$407m - AU$75m) (Based on the trailing twelve months to December 2018.)
So, Paragon Care has an ROCE of 4.3%.
Check out our latest analysis for Paragon Care
Is Paragon Care's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Paragon Care's ROCE appears meaningfully below the 9.3% average reported by the Healthcare industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Paragon Care stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Paragon Care's current ROCE of 4.3% is lower than 3 years ago, when the company reported a 5.7% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Paragon Care's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Paragon Care.