Should You Like Globus Medical, Inc.’s (NYSE:GMED) High Return On Capital Employed?

Today we are going to look at Globus Medical, Inc. (NYSE:GMED) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Globus Medical:

0.13 = US$174m ÷ (US$1.5b - US$95m) (Based on the trailing twelve months to September 2019.)

Therefore, Globus Medical has an ROCE of 13%.

See our latest analysis for Globus Medical

Does Globus Medical Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Globus Medical's ROCE is meaningfully better than the 9.1% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Globus Medical's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Globus Medical's current ROCE of 13% is lower than its ROCE in the past, which was 20%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Globus Medical's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Globus Medical's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Globus Medical has total liabilities of US$95m and total assets of US$1.5b. Therefore its current liabilities are equivalent to approximately 6.5% of its total assets. Low current liabilities have only a minimal impact on Globus Medical's ROCE, making its decent returns more credible.

Our Take On Globus Medical's ROCE

This is good to see, and while better prospects may exist, Globus Medical seems worth researching further. There might be better investments than Globus Medical 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.