Monash IVF Group (ASX:MVF) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Monash IVF Group (ASX:MVF), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Monash IVF Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.088 = AU$27m ÷ (AU$342m - AU$33m) (Based on the trailing twelve months to December 2020).

Therefore, Monash IVF Group has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 11%.

Check out our latest analysis for Monash IVF Group

In the above chart we have measured Monash IVF 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 Monash IVF Group.

What Can We Tell From Monash IVF Group's ROCE Trend?

We weren't thrilled with the trend because Monash IVF Group's ROCE has reduced by 47% over the last five years, while the business employed 21% more capital. That being said, Monash IVF Group raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Monash IVF Group probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line

In summary, Monash IVF Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 35% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Monash IVF Group has the makings of a multi-bagger.

Monash IVF Group does have some risks though, and we've spotted 2 warning signs for Monash IVF Group that you might be interested in.

While Monash IVF Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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