MEDNAX (NYSE: MD) may struggle to allocate capital
Ignoring a company’s stock price, what are the underlying trends that tell us that a company is past the growth stage? A potentially declining business often exhibits two trends, one return on capital employed (ROCE) down, and a based capital employed which is also declining. This combination can tell you that the business not only invests less, but earns less on what it invests. On that note, examining MEDNAX (NYSE: MD), we weren’t too optimistic about the way things were going.
What is Return on Employee Capital (ROCE)?
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. The formula for this calculation on MEDNAX is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.082 = US $ 176 million Ã· (US $ 2.5 billion – US $ 327 million) (Based on the last twelve months up to March 2021).
Therefore, MEDNAX has a ROCE of 8.2%. Ultimately, that’s a low return and it’s 12% below the healthcare industry average.
Discover our latest analysis for MEDNAX
Above you can see how MEDNAX’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for MEDNAX.
How are the returns evolving?
The ROCE trend at MEDNAX shows some signs of weakness. Sadly, returns have fallen dramatically over the past five years to reach the 8.2% we see today. In addition to this, MEDNAX now employs 50% less capital than five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to face competitive headwinds or to see its gap eroded. Generally, the companies that exhibit these characteristics are not the ones that tend to multiply over the long term, because statistically speaking, they have already gone through the growth phase of their life cycle.
The key to take away
In summary, it is unfortunate that MEDNAX is shrinking its capital base and also generating lower returns. Investors did not like these developments, as the stock fell 57% from five years ago. Unless there is a change to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we found 2 warning signs for MEDNAX (1 makes us a little uncomfortable), you should be aware of this.
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