Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Medicon Hellas (ATH:MEDIC), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
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 Medicon Hellas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = €392k ÷ (€28m - €3.4m) (Based on the trailing twelve months to June 2020).
So, Medicon Hellas has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 11%.
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.
How Are Returns Trending?
When we looked at the ROCE trend at Medicon Hellas, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 1.6%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.On a side note, Medicon Hellas has done well to pay down its current liabilities to 12% of total assets. Considering it used to be 84%, 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. 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 On Medicon Hellas' ROCE
In summary, Medicon Hellas is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 272% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Medicon Hellas (of which 3 shouldn't be ignored!) that you should know about.
While Medicon Hellas 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. 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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