What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Geratherm Medical (ETR:GME) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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 Geratherm Medical, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.043 = €1.3m ÷ (€36m – €7.2m) (Based on the trailing twelve months to June 2020).
Therefore, Geratherm Medical has an ROCE of 4.3%. In absolute terms, that’s a low return and it also under-performs the Medical Equipment industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Geratherm Medical’s ROCE against it’s prior returns. If you’d like to look at how Geratherm Medical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of Geratherm Medical’s historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 10% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line
To conclude, we’ve found that Geratherm Medical is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 24% to shareholders over the last five years. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you’d like to know more about Geratherm Medical, we’ve spotted 4 warning signs, and 1 of them can’t be ignored.
While Geratherm Medical may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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