Medacta Group's (VTX:MOVE) Dark Secret: Can They Allocate Capital Effectively?

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 proven ability to reinvest at increasingly high returns on equity (ROE), which is a hallmark of a multi-bagger. Ultimately, this demonstrates that a business is producing a cash influx due to its ability to reinvest its earnings at high rates of return.

With that in mind, you may want to consider Medacta Group (VTX:MOVE). In this article, I will go through the ROE of Medacta Group so that we can see if they indeed have this quality.

Return on Equity = Net Profit ÷ Shareholders' Equity (see definition and formula)

ROE measures Medacta Group's profit relative to its shareholders' equity. One way to conceptualize this is that ROE may give us a view on the amount of profit the company generated per dollar of shareholders' equity.

So, based on the above formula, Medacta Group's ROE for the last 12 months is: 5.6% (based on above)

What does this mean? In essence, for every CHF1 shareholders' equity, Medacta Group made CHF0.06 profit. ROE allows us to gauge the return on the capital the company has actually utilized (as opposed to just the amount of capital it has access to). This then helps us gauge the likelihood of the company paying back any capital raised.

What does it mean for Medacta Group to have a 5.6% ROE? By itself, it does not say much. However, combined with some additional facts you may get a clearer picture. Considering Medacta Group's size, with a market capitalization of CHF 1.9b, we would expect to see institutional investors on the register. Remember, this is not an area to be taken lightly. It is important for many investors to consider if management and the board of directors' interests are aligned with those of general investors. At least some institutional investors have bought in to the idea of Medacta Group since a significant amount of the shares it listed are held by institutions.

When we put together Medacta Group's low ROE with a low cost of equity, the picture isn't that good. This does look a bit concerning and I'm not holding my breath for Medacta Group. At this moment in time, I am still somewhat pessimistic about the company's capital allocation.