Medicare Group Q.P.S.C's (DSM:MCGS) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Medicare Group Q.P.S.C (DSM:MCGS), we weren't too hopeful.

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. To calculate this metric for Medicare Group Q.P.S.C, this is the formula:

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

0.07 = ر.ق80m ÷ (ر.ق1.3b - ر.ق157m) (Based on the trailing twelve months to March 2021).

Thus, Medicare Group Q.P.S.C has an ROCE of 7.0%. 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

Above you can see how the current ROCE for Medicare Group Q.P.S.C compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Medicare Group Q.P.S.C here for free.

What Does the ROCE Trend For Medicare Group Q.P.S.C Tell Us?

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 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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

In summary, it's unfortunate that Medicare Group Q.P.S.C is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 9.4% return to shareholders who held over 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 shouldn't be ignored...

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