There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Med Life's (BVB:M) ROCE trend, we were pretty happy with what we saw.
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. The formula for this calculation on Med Life is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RON89m ÷ (RON1.1b - RON359m) (Based on the trailing twelve months to September 2020).
Therefore, Med Life has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 6.9% it's much better.
Check out 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.
What Can We Tell From Med Life's ROCE Trend?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 195% more capital into its operations. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Bottom Line
The main thing to remember is that Med Life has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we've spotted 2 warning signs facing Med Life that you might find interesting.
While Med Life isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
Reasonable growth potential and fair value.
