If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Med Life (BVB:M) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Med Life is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = RON156m ÷ (RON1.2b - RON319m) (Based on the trailing twelve months to March 2021).
Therefore, Med Life has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Healthcare industry.
See our latest analysis for Med Life
In the above chart we have measured Med Life's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Med Life's ROCE Trending?
Med Life is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 231%. So we're very much inspired by what we're seeing at Med Life thanks to its ability to profitably reinvest capital.
The Bottom Line On Med Life's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Med Life has. And a remarkable 179% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Med Life, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Med Life 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.
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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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About BVB:M
Med Life
A private healthcare provider, offers healthcare services in Bucharest, Cluj, Braila, Timisoara, Iasi, Galati, Ploiesti, Constanta, and Targu Mures.
High growth potential and slightly overvalued.
