Be Wary Of Medicare Group Q.P.S.C (DSM:MCGS) And Its Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Medicare Group Q.P.S.C (DSM:MCGS), we've spotted some signs that it could be struggling, so let's investigate.

What is 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. Analysts use this formula to calculate it for Medicare Group Q.P.S.C:

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

0.067 = ر.ق77m ÷ (ر.ق1.3b - ر.ق129m) (Based on the trailing twelve months to September 2020).

Therefore, Medicare Group Q.P.S.C has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.8%.

See our latest analysis for Medicare Group Q.P.S.C

In the above chart we have measured Medicare Group Q.P.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Medicare Group Q.P.S.C.

How Are Returns Trending?

In terms of Medicare Group Q.P.S.C's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Medicare Group Q.P.S.C becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 13% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Medicare Group Q.P.S.C does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Medicare Group Q.P.S.C may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

If you’re looking to trade Medicare Group Q.P.S.C, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.