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Today we are going to look at Metropolis Healthcare Limited (NSE:METROPOLIS) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. 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?

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 Metropolis Healthcare:

0.45 = ?1.9b ÷ (?5.5b - ?1.2b) (Based on the trailing twelve months to March 2019.)

Therefore, Metropolis Healthcare has an ROCE of 45%.

View our latest analysis for Metropolis Healthcare

Does Metropolis Healthcare Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Metropolis Healthcare's ROCE appears to be substantially greater than the 16% average in the Healthcare industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Metropolis Healthcare's ROCE currently appears to be excellent.

Our data shows that Metropolis Healthcare currently has an ROCE of 45%, compared to its ROCE of 29% 3 years ago. This makes us think the business might be improving. The image below shows how Metropolis Healthcare's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Metropolis Healthcare.