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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at M1 Kliniken (ETR:M12) and its trend of ROCE, we really liked what we saw.
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 M1 Kliniken is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = €22m ÷ (€203m - €57m) (Based on the trailing twelve months to June 2024).
So, M1 Kliniken has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 5.3% it's much better.
View our latest analysis for M1 Kliniken
Above you can see how the current ROCE for M1 Kliniken 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 M1 Kliniken .
So How Is M1 Kliniken's ROCE Trending?
We like the trends that we're seeing from M1 Kliniken. Over the last five years, returns on capital employed have risen substantially to 15%. The amount of capital employed has increased too, by 84%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line
All in all, it's terrific to see that M1 Kliniken is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 40% to shareholders. So with that in mind, we think the stock deserves further research.