Returns Are Gaining Momentum At Medcomtech (BME:MED)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Medcomtech's (BME:MED) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Medcomtech is:

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

0.039 = €547k ÷ (€28m - €14m) (Based on the trailing twelve months to December 2022).

Therefore, Medcomtech has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.4%.

See our latest analysis for Medcomtech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Medcomtech's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Medcomtech, check out these free graphs here.

How Are Returns Trending?

Shareholders will be relieved that Medcomtech has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 3.9%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Medcomtech has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Medcomtech's ROCE

In summary, we're delighted to see that Medcomtech has been able to increase efficiencies and earn higher rates of return on the same amount of capital. However the stock is down a substantial 90% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

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

While Medcomtech 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.