Meridian Bioscience, Inc. (NASDAQ:VIVO) Earns Among The Best Returns In Its Industry
Today we'll evaluate Meridian Bioscience, Inc. (NASDAQ:VIVO) to determine whether it could have potential as an investment idea. 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.
Firstly, 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
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 Meridian Bioscience:
0.12 = US$35m ÷ (US$338m - US$35m) (Based on the trailing twelve months to December 2019.)
Therefore, Meridian Bioscience has an ROCE of 12%.
Check out our latest analysis for Meridian Bioscience
Is Meridian Bioscience's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Meridian Bioscience's ROCE appears to be substantially greater than the 9.0% average in the Medical Equipment industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Meridian Bioscience compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Meridian Bioscience's current ROCE of 12% is lower than its ROCE in the past, which was 22%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Meridian Bioscience's ROCE compares to its industry, and you can click it to see more detail on its 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. 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 Meridian Bioscience.
Meridian Bioscience'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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Meridian Bioscience has total assets of US$338m and current liabilities of US$35m. As a result, its current liabilities are equal to approximately 10% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Meridian Bioscience's ROCE
With that in mind, Meridian Bioscience's ROCE appears pretty good. Meridian Bioscience 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).
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.
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