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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 briefly looking over the numbers, we don't think Pediatrix Medical Group (NYSE:MD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Pediatrix Medical Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$215m ÷ (US$2.3b - US$352m) (Based on the trailing twelve months to September 2022).
Therefore, Pediatrix Medical Group has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Healthcare industry average of 10%.
See our latest analysis for Pediatrix Medical Group
Above you can see how the current ROCE for Pediatrix Medical 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 Pediatrix Medical Group here for free.
How Are Returns Trending?
We're a bit concerned with the trends, because the business is applying 62% less capital than it was five years ago and returns on that capital have stayed flat. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.
The Key Takeaway
Overall, we're not ecstatic to see Pediatrix Medical Group reducing the amount of capital it employs in the business. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 73% in the last five years. Therefore based on the analysis done in this article, we don't think Pediatrix Medical Group has the makings of a multi-bagger.
Pediatrix Medical Group does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.
While Pediatrix Medical Group 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.