Returns On Capital At Fresenius Medical Care KGaA (ETR:FME) Paint A Concerning Picture

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Fresenius Medical Care KGaA (ETR:FME), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Fresenius Medical Care KGaA, this is the formula:

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

0.051 = €1.5b ÷ (€36b - €6.5b) (Based on the trailing twelve months to March 2023).

Thus, Fresenius Medical Care KGaA has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Healthcare industry average of 5.5%.

View our latest analysis for Fresenius Medical Care KGaA

In the above chart we have measured Fresenius Medical Care KGaA'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.

What Does the ROCE Trend For Fresenius Medical Care KGaA Tell Us?

On the surface, the trend of ROCE at Fresenius Medical Care KGaA doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Fresenius Medical Care KGaA is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Fresenius Medical Care KGaA does have some risks though, and we've spotted 2 warning signs for Fresenius Medical Care KGaA that you might be interested in.

While Fresenius Medical Care KGaA 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.