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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 Monash IVF Group (ASX:MVF), we don't think it's current trends fit the mold of a multi-bagger.
What is 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. Analysts use this formula to calculate it for Monash IVF Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = AU$22m ÷ (AU$349m - AU$38m) (Based on the trailing twelve months to June 2020).
So, Monash IVF Group has an ROCE of 7.2%. In absolute terms, that's a low return but it's around the Healthcare industry average of 7.8%.
Above you can see how the current ROCE for Monash IVF 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 Monash IVF Group here for free.
So How Is Monash IVF Group's ROCE Trending?
We weren't thrilled with the trend because Monash IVF Group's ROCE has reduced by 52% over the last five years, while the business employed 24% more capital. Usually this isn't ideal, but given Monash IVF Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Monash IVF Group's earnings and if they change as a result from the capital raise.
To conclude, we've found that Monash IVF Group is reinvesting in the business, but returns have been falling. Since the stock has declined 32% 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 Monash IVF Group has the makings of a multi-bagger.
If you'd like to know more about Monash IVF Group, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.
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. 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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