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M1 Kliniken (ETR:M12) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 M1 Kliniken (ETR:M12), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for M1 Kliniken:

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

0.061 = €9.5m ÷ (€190m - €34m) (Based on the trailing twelve months to June 2022).

So, M1 Kliniken has an ROCE of 6.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.6%.

View our latest analysis for M1 Kliniken

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In the above chart we have measured M1 Kliniken'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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at M1 Kliniken, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 6.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by M1 Kliniken's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 33% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think M1 Kliniken has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with M1 Kliniken and understanding it should be part of your investment process.

While M1 Kliniken isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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