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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, MedNation (FRA:EIF) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for MedNation, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = €3.3m ÷ (€71m - €8.8m) (Based on the trailing twelve months to June 2024).
Therefore, MedNation has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.5% average generated by the Healthcare industry.
See our latest analysis for MedNation
Historical performance is a great place to start when researching a stock so above you can see the gauge for MedNation's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of MedNation.
What Does the ROCE Trend For MedNation Tell Us?
Shareholders will be relieved that MedNation has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.3% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line On MedNation's ROCE
To sum it up, MedNation is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 36% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 4 warning signs we've spotted with MedNation (including 3 which shouldn't be ignored) .