MedPlus Health Services (NSE:MEDPLUS) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at MedPlus Health Services (NSE:MEDPLUS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on MedPlus Health Services is:

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

0.04 = ₹861m ÷ (₹26b - ₹4.7b) (Based on the trailing twelve months to December 2022).

So, MedPlus Health Services has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.1%.

Check out our latest analysis for MedPlus Health Services

In the above chart we have measured MedPlus Health Services' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MedPlus Health Services here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at MedPlus Health Services doesn't inspire confidence. Over the last three years, returns on capital have decreased to 4.0% from 12% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, MedPlus Health Services has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

Our Take On MedPlus Health Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MedPlus Health Services. However, despite the promising trends, the stock has fallen 40% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

MedPlus Health Services does have some risks though, and we've spotted 1 warning sign for MedPlus Health Services that you might be interested in.

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.