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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into MEDNAX (NYSE:MD), we weren't too upbeat about how things were going.
Understanding 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)
0.083 = US$184m ÷ (US$2.6b - US$351m) (Based on the trailing twelve months to June 2021).
Thus, MEDNAX has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 12%.
In the above chart we have measured MEDNAX's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MEDNAX here for free.
So How Is MEDNAX's ROCE Trending?
We are a bit anxious about the trends of ROCE at MEDNAX. Unfortunately, returns have declined substantially over the last five years to the 8.3% we see today. In addition to that, MEDNAX is now employing 50% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
Our Take On MEDNAX's ROCE
In summary, it's unfortunate that MEDNAX is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing MEDNAX we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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