The Return Trends At Molina Healthcare (NYSE:MOH) Look Promising

By
Simply Wall St
Published
January 24, 2022
NYSE:MOH
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Molina Healthcare's (NYSE:MOH) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Molina Healthcare:

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

0.16 = US$814m ÷ (US$11b - US$6.1b) (Based on the trailing twelve months to September 2021).

Therefore, Molina Healthcare has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 12% it's much better.

Check out our latest analysis for Molina Healthcare

roce
NYSE:MOH Return on Capital Employed January 24th 2022

In the above chart we have measured Molina Healthcare's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Molina Healthcare.

The Trend Of ROCE

Molina Healthcare is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 71%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Molina Healthcare has a high ratio of current liabilities to total assets of 55%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Molina Healthcare's ROCE

To sum it up, Molina Healthcare has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 384% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Molina Healthcare can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Molina Healthcare that we think you should be aware of.

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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