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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Pediatrix Medical Group (NYSE:MD) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Pediatrix Medical Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$152m ÷ (US$2.0b - US$310m) (Based on the trailing twelve months to June 2024).
So, Pediatrix Medical Group has an ROCE of 9.0%. On its own, that's a low figure but it's around the 10% average generated by the Healthcare industry.
Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Pediatrix Medical Group .
What The Trend Of ROCE Can Tell Us
We're pretty happy with how the ROCE has been trending at Pediatrix Medical Group. We found that the returns on capital employed over the last five years have risen by 51%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 68% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
What We Can Learn From Pediatrix Medical Group's ROCE
From what we've seen above, Pediatrix Medical Group has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 49% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Pediatrix Medical Group does have some risks though, and we've spotted 3 warning signs for Pediatrix Medical Group that you might be interested in.