Return Trends At Pediatrix Medical Group (NYSE:MD) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Pediatrix Medical Group (NYSE:MD), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Pediatrix Medical Group, this is the formula:

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

0.11 = US$215m ÷ (US$2.3b - US$352m) (Based on the trailing twelve months to September 2022).

Therefore, Pediatrix Medical Group has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Healthcare industry.

View our latest analysis for Pediatrix Medical Group

Above you can see how the current ROCE for Pediatrix Medical Group 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 Pediatrix Medical Group here for free.

How Are Returns Trending?

Over the past five years, Pediatrix Medical Group's ROCE has remained relatively flat while the business is using 62% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. So if this trend continues, don't be surprised if the business is smaller in a few years time.

The Key Takeaway

In summary, Pediatrix Medical Group isn't reinvesting funds back into the business and returns aren't growing. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 72% in the last five years. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Pediatrix Medical Group (of which 1 doesn't sit too well with us!) that you should know about.

While Pediatrix Medical Group 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. 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.