I am writing today to help inform people who are new to the stock market and want to begin learning the link between Mercator Medical SA (WSE:MRC)’s return fundamentals and stock market performance.
Mercator Medical stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Mercator Medical is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Mercator Medical’s Return On Capital Employed
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. We’ll look at Mercator Medical’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. MRC’s ROCE is calculated below:
ROCE Calculation for MRC
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = zł10.41m ÷ (zł319.36m – zł116.22m) = 5.12%
As you can see, MRC earned PLN5.1 from every PLN100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which MRC has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
What is causing this?
The underperforming ROCE is not ideal for Mercator Medical investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, MRC’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of MRC’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that MRC weakened investor return on capital employed from 13.17%. The movement in the earnings variable over this time shows a fall from zł13.88m to zł10.41m whilst capital employed has increased due to a rise in total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
MRC’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability. Mercator Medical’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for MRC’s future growth? Take a look at our free research report of analyst consensus for MRC’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Mercator Medical’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.