Be Wary Of Fresenius Medical Care KGaA (ETR:FME) And Its Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Fresenius Medical Care KGaA (ETR:FME) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fresenius Medical Care KGaA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = €1.5b ÷ (€36b - €6.6b) (Based on the trailing twelve months to September 2023).
Therefore, Fresenius Medical Care KGaA has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Healthcare industry average of 6.0%.
See our latest analysis for Fresenius Medical Care KGaA
Above you can see how the current ROCE for Fresenius Medical Care KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Fresenius Medical Care KGaA.
How Are Returns Trending?
In terms of Fresenius Medical Care KGaA's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. However it looks like Fresenius Medical Care KGaA might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
Our Take On Fresenius Medical Care KGaA's ROCE
Bringing it all together, while we're somewhat encouraged by Fresenius Medical Care KGaA's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 44% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a separate note, we've found 3 warning signs for Fresenius Medical Care KGaA you'll probably want to know about.
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.
