What trends should we look for it we want to identify stocks that can 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. With that in mind, we’ve noticed some promising trends at Invacare (NYSE:IVC) so let’s look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Invacare, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.017 = US$9.6m ÷ (US$886m – US$313m) (Based on the trailing twelve months to June 2020).
Thus, Invacare has an ROCE of 1.7%. In absolute terms, that’s a low return and it also under-performs the Medical Equipment industry average of 8.8%.
Above you can see how the current ROCE for Invacare compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Invacare.
How Are Returns Trending?
Invacare has broken into the black (profitability) and we’re sure it’s a sight for sore eyes. While the business was unprofitable in the past, it’s now turned things around and is earning 1.7% on its capital. While returns have increased, the amount of capital employed by Invacare has remained flat over the period. With no noticeable increase in capital employed, it’s worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Key Takeaway
As discussed above, Invacare appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Given the stock has declined 57% in the last five years, there could be a chance of a good investment here if the valuation makes sense. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing to note, we’ve identified 2 warning signs with Invacare and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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