Medicon Hellas (ATH:MEDIC) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Medicon Hellas (ATH:MEDIC) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Medicon Hellas:

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

0.19 = €5.0m ÷ (€31m - €4.7m) (Based on the trailing twelve months to December 2021).

Therefore, Medicon Hellas has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 9.9% it's much better.

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're interested in investigating Medicon Hellas' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Medicon Hellas' ROCE Trending?

On the surface, the trend of ROCE at Medicon Hellas doesn't inspire confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 19%. 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, Medicon Hellas has done well to pay down its current liabilities to 15% of total assets. Since the ratio used to be 78%, that's a significant reduction and it no doubt explains the drop 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Medicon Hellas. And the stock has done incredibly well with a 358% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Medicon Hellas, we've discovered 2 warning signs that you should be aware of.

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.

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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.