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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Monash IVF Group (ASX:MVF), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Monash IVF Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.093 = AU$35m ÷ (AU$422m - AU$47m) (Based on the trailing twelve months to June 2023).
Thus, Monash IVF Group has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 7.5% generated by the Healthcare industry, it's much better.
See our latest analysis for Monash IVF Group
In the above chart we have measured Monash IVF Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Monash IVF Group.
So How Is Monash IVF Group's ROCE Trending?
When we looked at the ROCE trend at Monash IVF Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.3% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Monash IVF Group. And the stock has followed suit returning a meaningful 87% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to continue researching Monash IVF Group, you might be interested to know about the 1 warning sign that our analysis has discovered.