Returns On Capital Are Showing Encouraging Signs At MedNation (FRA:EIF)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in MedNation's (FRA:EIF) returns on capital, so let's have a look.

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. The formula for this calculation on MedNation is:

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

0.02 = €1.3m ÷ (€75m - €10m) (Based on the trailing twelve months to December 2022).

So, MedNation has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 5.5%.

View our latest analysis for MedNation

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 want to delve into the historical earnings, revenue and cash flow of MedNation, check out these free graphs here.

SWOT Analysis for MedNation

What The Trend Of ROCE Can Tell Us

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.0%. The amount of capital employed has increased too, by 31%. So we're very much inspired by what we're seeing at MedNation thanks to its ability to profitably reinvest capital.

What We Can Learn From MedNation's ROCE

All in all, it's terrific to see that MedNation is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

MedNation does have some risks though, and we've spotted 3 warning signs for MedNation that you might be interested in.

While MedNation 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.