Yahoo Finance What Can We Learn From Siemens Healthineers AG’s (ETR:SHL) Investment Returns?
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Today we'll evaluate Siemens Healthineers AG (ETR:SHL) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Siemens Healthineers:
0.13 = €2.0b ÷ (€20b - €5.0b) (Based on the trailing twelve months to December 2018.)
Therefore, Siemens Healthineers has an ROCE of 13%.
Check out our latest analysis for Siemens Healthineers
Does Siemens Healthineers Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Siemens Healthineers's ROCE is around the 11% average reported by the Medical Equipment industry. Regardless of where Siemens Healthineers sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Siemens Healthineers's current ROCE of 13% is lower than 3 years ago, when the company reported a 27% ROCE. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Siemens Healthineers's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Siemens Healthineers has total liabilities of €5.0b and total assets of €20b. As a result, its current liabilities are equal to approximately 25% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Siemens Healthineers's ROCE
Overall, Siemens Healthineers has a decent ROCE and could be worthy of further research. Siemens Healthineers shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
