Examining UMP Healthcare Holdings Limited’s (HKG:722) Weak Return On Capital Employed

Simply Wall St

Today we'll look at UMP Healthcare Holdings Limited (HKG:722) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. 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 UMP Healthcare Holdings:

0.015 = HK$11m ÷ (HK$842m - HK$139m) (Based on the trailing twelve months to June 2019.)

Therefore, UMP Healthcare Holdings has an ROCE of 1.5%.

See our latest analysis for UMP Healthcare Holdings

Is UMP Healthcare Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, UMP Healthcare Holdings's ROCE appears to be significantly below the 8.3% average in the Healthcare industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how UMP Healthcare Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. There are potentially more appealing investments elsewhere.

We can see that, UMP Healthcare Holdings currently has an ROCE of 1.5%, less than the 7.9% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how UMP Healthcare Holdings's past growth compares to other companies.

SEHK:722 Past Revenue and Net Income, February 18th 2020

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. ROCE is only a point-in-time measure. You can check if UMP Healthcare Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How UMP Healthcare Holdings'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

UMP Healthcare Holdings has current liabilities of HK$139m and total assets of HK$842m. As a result, its current liabilities are equal to approximately 16% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On UMP Healthcare Holdings's ROCE

UMP Healthcare Holdings has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

UMP Healthcare Holdings is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.

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. Thank you for reading.