In This Article:
Today we are going to look at Thomson Medical Group Limited (SGX:A50) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from 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 Thomson Medical Group:
0.039 = S$39m ÷ (S$1.3b - S$298m) (Based on the trailing twelve months to June 2019.)
Therefore, Thomson Medical Group has an ROCE of 3.9%.
View our latest analysis for Thomson Medical Group
Does Thomson Medical Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Thomson Medical Group's ROCE appears meaningfully below the 13% 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. Putting aside Thomson Medical Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Thomson Medical Group's current ROCE of 3.9% is lower than its ROCE in the past, which was 6.9%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Thomson Medical Group's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Thomson Medical Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.