Investors Could Be Concerned With Medica Group's (LON:MGP) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Medica Group (LON:MGP) and its ROCE trend, we weren't exactly thrilled.

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

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 Medica Group:

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

0.17 = UK£11m ÷ (UK£80m - UK£18m) (Based on the trailing twelve months to June 2022).

So, Medica Group has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 10% generated by the Healthcare industry.

Check out our latest analysis for Medica Group

Above you can see how the current ROCE for Medica Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Medica Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 22% 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Medica Group's current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 17%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

While returns have fallen for Medica Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 8.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

While Medica Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.