MEDNAX (NYSE:MD) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into MEDNAX (NYSE:MD), we weren't too upbeat about how things were going.

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 MEDNAX is:

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

0.082 = US$176m ÷ (US$2.5b - US$327m) (Based on the trailing twelve months to March 2021).

So, MEDNAX has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 12%.

Check out our latest analysis for MEDNAX

Above you can see how the current ROCE for MEDNAX compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MEDNAX.

How Are Returns Trending?

The trend of ROCE at MEDNAX is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 8.2% we see today. In addition to that, MEDNAX is now employing 50% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

In summary, it's unfortunate that MEDNAX is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 2 warning signs for MEDNAX (1 makes us a bit uncomfortable) you should be aware of.

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