There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Monash IVF Group (ASX:MVF) and its ROCE trend, we weren’t exactly thrilled.
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Monash IVF Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = AU$34m ÷ (AU$350m – AU$34m) (Based on the trailing twelve months to December 2021).
So, Monash IVF Group has an ROCE of 11%. On its own, that’s a standard return, however it’s much better than the 6.2% generated by the Healthcare industry.
View our latest analysis for Monash IVF Group
In the above chart we have measured Monash IVF Group’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
When we looked at the ROCE trend at Monash IVF Group, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 11% from 18% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Monash IVF Group. These growth trends haven’t led to growth returns though, since the stock has fallen 15% over the last five years. As a result, we’d recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you’d like to know about the risks facing Monash IVF Group, we’ve discovered 1 warning sign that 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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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.