Yahoo Finance Medica Group (LON:MGP) Will Want To Turn Around Its Return Trends
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Medica Group (LON:MGP), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Medica Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = UK£9.3m ÷ (UK£81m - UK£22m) (Based on the trailing twelve months to December 2021).
So, Medica Group has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Healthcare industry.
See our latest analysis for Medica Group
In the above chart we have measured Medica Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Medica Group.
What The Trend Of ROCE Can Tell Us
In terms of Medica Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 22% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 27%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 16%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Medica Group. These growth trends haven't led to growth returns though, since the stock has fallen 26% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you're still interested in Medica Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
