Investors Could Be Concerned With Medicon Hellas' (ATH:MEDIC) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Medicon Hellas (ATH:MEDIC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Medicon Hellas is:

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

0.064 = €1.6m ÷ (€29m - €3.9m) (Based on the trailing twelve months to December 2020).

Thus, Medicon Hellas has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 15%.

View our latest analysis for Medicon Hellas

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

What Can We Tell From Medicon Hellas' ROCE Trend?

When we looked at the ROCE trend at Medicon Hellas, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.4% from 36% 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.

On a side note, Medicon Hellas has done well to pay down its current liabilities to 14% of total assets. Considering it used to be 80%, that's a huge drop in that ratio and it would explain the decline in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Medicon Hellas is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 558% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Medicon Hellas does have some risks, we noticed 3 warning signs (and 1 which is a bit concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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