Returns On Capital At MEDNAX (NYSE:MD) Paint A Concerning Picture
What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within MEDNAX (NYSE:MD), we weren't too hopeful.
What is 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. The formula for this calculation on MEDNAX is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.085 = US$192m ÷ (US$2.6b - US$398m) (Based on the trailing twelve months to September 2021).
So, MEDNAX has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 11%.
See our latest analysis for MEDNAX
Above you can see how the current ROCE for MEDNAX compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
The trend of ROCE at MEDNAX is showing some signs of weakness. To be more specific, today's ROCE was 12% five years ago but has since fallen to 8.5%. On top of that, the business is utilizing 54% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
In Conclusion...
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 65% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 2 warning signs for MEDNAX (1 shouldn't be ignored) you should be aware of.
While MEDNAX may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
