What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at MEDNAX (NYSE:MD) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for MEDNAX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.13 = US$372m ÷ (US$3.4b – US$488m) (Based on the trailing twelve months to December 2020).
Thus, MEDNAX has an ROCE of 13%. On its own, that’s a standard return, however it’s much better than the 9.6% generated by the Healthcare industry.
In the above chart we have measured MEDNAX’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Over the past five years, MEDNAX’s ROCE has remained relatively flat while the business is using 29% less capital than before. To us that doesn’t look like a multi-bagger because the company appears to be selling assets and it’s returns aren’t increasing. So if this trend continues, don’t be surprised if the business is smaller in a few years time.
The Bottom Line
It’s a shame to see that MEDNAX is effectively shrinking in terms of its capital base. Since the stock has declined 69% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you want to know some of the risks facing MEDNAX we’ve found 2 warning signs (1 can’t be ignored!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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