Today well evaluate GeneReach Biotechnology Corp. (GTSM:4171) to determine whether it could have potential as an investment idea. To be precise, well consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, well work out how to calculate ROCE. Second, well look at its ROCE compared to similar companies. Then well determine how its current liabilities are affecting its ROCE.

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. 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.

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 GeneReach Biotechnology:

0.11 = NT$72m (NT$713m NT$61m) (Based on the trailing twelve months to September 2019.)

Therefore, GeneReach Biotechnology has an ROCE of 11%.

View our latest analysis for GeneReach Biotechnology

One way to assess ROCE is to compare similar companies. Using our data, GeneReach Biotechnologys ROCE appears to be around the 9.5% average of the Medical Equipment industry. Regardless of where GeneReach Biotechnology sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

GeneReach Biotechnology has an ROCE of 11%, but it didnt have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how GeneReach Biotechnologys ROCE compares to its industry, and you can click it to see more detail on its past growth.

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. Since the future is so important for investors, you should check out our free report on analyst forecasts for GeneReach Biotechnology.

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

GeneReach Biotechnology has total assets of NT$713m and current liabilities of NT$61m. As a result, its current liabilities are equal to approximately 8.6% of its total assets. With low current liabilities, GeneReach Biotechnologys decent ROCE looks that much more respectable.

This is good to see, and while better prospects may exist, GeneReach Biotechnology seems worth researching further. GeneReach Biotechnology 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.

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.

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Is GeneReach Biotechnology Corp. (GTSM:4171) Investing Effectively In Its Business? - Simply Wall St