Here's What's Concerning About M1 Kliniken's (ETR:M12) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think M1 Kliniken (ETR:M12) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for M1 Kliniken:

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

0.074 = €11m ÷ (€196m - €44m) (Based on the trailing twelve months to June 2021).

So, M1 Kliniken has an ROCE of 7.4%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.

See our latest analysis for M1 Kliniken

In the above chart we have measured M1 Kliniken'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 M1 Kliniken.

What The Trend Of ROCE Can Tell Us

In terms of M1 Kliniken's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.4% from 35% 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 23%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On M1 Kliniken's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that M1 Kliniken is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 25% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing, we've spotted 2 warning signs facing M1 Kliniken that you might find interesting.

While M1 Kliniken 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. 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.