What Do The Returns On Capital At Monash IVF Group (ASX:MVF) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Monash IVF Group (ASX:MVF) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Monash IVF Group:

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

0.072 = AU$22m ÷ (AU$349m - AU$38m) (Based on the trailing twelve months to June 2020).

So, Monash IVF Group has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Healthcare industry average of 7.8%.

View 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, you can check out the forecasts from the analysts covering Monash IVF Group here for free.

So How Is Monash IVF Group's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 15% five years ago, while the business's capital employed increased by 24%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Monash IVF Group's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. 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 come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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