Medicover (STO:MCOV B) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Medicover (STO:MCOV B) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Medicover, this is the formula:

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

0.049 = €77m ÷ (€2.1b - €566m) (Based on the trailing twelve months to December 2024).

Therefore, Medicover has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.0%.

View our latest analysis for Medicover

Above you can see how the current ROCE for Medicover compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Medicover .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Medicover, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Medicover's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Medicover. And long term investors must be optimistic going forward because the stock has returned a huge 149% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Medicover does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.