MeVis Medical Solutions (ETR:M3V) Is Very Good At Capital Allocation

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of MeVis Medical Solutions (ETR:M3V) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for MeVis Medical Solutions:

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

0.26 = €5.9m ÷ (€24m - €1.8m) (Based on the trailing twelve months to March 2023).

Thus, MeVis Medical Solutions has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

See our latest analysis for MeVis Medical Solutions

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating MeVis Medical Solutions' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For MeVis Medical Solutions Tell Us?

We're pretty happy with how the ROCE has been trending at MeVis Medical Solutions. We found that the returns on capital employed over the last five years have risen by 22%. The company is now earning €0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 36% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On MeVis Medical Solutions' ROCE

From what we've seen above, MeVis Medical Solutions has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 25% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about MeVis Medical Solutions, we've spotted 2 warning signs, and 1 of them is potentially serious.

MeVis Medical Solutions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.