Is BioTelemetry, Inc.'s (NASDAQ:BEAT) Capital Allocation Ability Worth Your Time?

Simply Wall St

Today we are going to look at BioTelemetry, Inc. (NASDAQ:BEAT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. 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'.

So, How Do We Calculate ROCE?

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 BioTelemetry:

0.12 = US$71m ÷ (US$664m - US$59m) (Based on the trailing twelve months to June 2019.)

Therefore, BioTelemetry has an ROCE of 12%.

See our latest analysis for BioTelemetry

Does BioTelemetry Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that BioTelemetry's ROCE is fairly close to the Healthcare industry average of 11%. Separate from BioTelemetry's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

BioTelemetry's current ROCE of 12% is lower than 3 years ago, when the company reported a 18% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how BioTelemetry's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:BEAT Past Revenue and Net Income, September 10th 2019
NasdaqGS:BEAT Past Revenue and Net Income, September 10th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for BioTelemetry.

BioTelemetry's Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

BioTelemetry has total liabilities of US$59m and total assets of US$664m. As a result, its current liabilities are equal to approximately 8.9% of its total assets. With low current liabilities, BioTelemetry's decent ROCE looks that much more respectable.

Our Take On BioTelemetry's ROCE

If BioTelemetry can continue reinvesting in its business, it could be an attractive prospect. There might be better investments than BioTelemetry out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like BioTelemetry better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.