To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Pediatrix Medical Group (NYSE:MD), we don't think it's current trends fit the mold of a multi-bagger.
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)
0.088 = US$174m ÷ (US$2.3b - US$350m) (Based on the trailing twelve months to September 2023).
Thus, Pediatrix Medical Group has an ROCE of 8.8%. On its own, that's a low figure but it's around the 9.9% average generated by the Healthcare industry.
See our latest analysis for Pediatrix Medical Group
In the above chart we have measured Pediatrix Medical Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
We're a bit concerned with the trends, because the business is applying 63% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 8.8%, it's hard to get excited about these developments.
The Key Takeaway
In summary, Pediatrix Medical Group isn't reinvesting funds back into the business and returns aren't growing. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 76% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you want to know some of the risks facing Pediatrix Medical Group we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.
While Pediatrix Medical Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.