What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at MEDNAX (NYSE:MD), it didn't seem to tick all of these boxes.
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. Analysts use this formula to calculate it for MEDNAX:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$218m ÷ (US$2.7b - US$427m) (Based on the trailing twelve months to December 2021).
So, MEDNAX has an ROCE of 9.5%. On its own, that's a low figure but it's around the 10% average generated by the Healthcare industry.
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, you can check out the forecasts from the analysts covering MEDNAX here for free.
The Trend Of ROCE
Over the past five years, MEDNAX's ROCE has remained relatively flat while the business is using 53% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Bottom Line On MEDNAX's ROCE
It's a shame to see that MEDNAX is effectively shrinking in terms of its capital base. And in the last five years, the stock has given away 61% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
On a separate note, we've found 1 warning sign for MEDNAX you'll probably want to 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.
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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.
About NYSE:MD
Pediatrix Medical Group
Provides newborn, maternal-fetal, pediatric cardiology, and other pediatric subspecialty care services in the United States.
Good value with adequate balance sheet.
