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. However, after briefly looking over the numbers, we don't think Medical Facilities (TSE:DR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 Medical Facilities:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$64m ÷ (US$447m - US$81m) (Based on the trailing twelve months to December 2021).
Therefore, Medical Facilities has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Healthcare industry.
Check out our latest analysis for Medical Facilities
In the above chart we have measured Medical Facilities' 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 Medical Facilities here for free.
What Can We Tell From Medical Facilities' ROCE Trend?
Over the past five years, Medical Facilities' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Medical Facilities to be a multi-bagger going forward.
Our Take On Medical Facilities' ROCE
In a nutshell, Medical Facilities has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 10% in the last five years. Therefore based on the analysis done in this article, we don't think Medical Facilities has the makings of a multi-bagger.
If you'd like to know about the risks facing Medical Facilities, we've discovered 2 warning signs that you should be aware of.
While Medical Facilities isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
About TSX:DR
Medical Facilities
Through its subsidiaries, owns and operates specialty hospitals and ambulatory surgery center in the United States.
Excellent balance sheet and good value.
