Nanosonics (ASX:NAN) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Nanosonics (ASX:NAN) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Nanosonics is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.082 = AU$12m ÷ (AU$171m - AU$20m) (Based on the trailing twelve months to December 2021).

Therefore, Nanosonics has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 12%.

View our latest analysis for Nanosonics

Above you can see how the current ROCE for Nanosonics 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 Nanosonics.

The Trend Of ROCE

On the surface, the trend of ROCE at Nanosonics doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 8.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Nanosonics' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nanosonics. In light of this, the stock has only gained 37% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Nanosonics, you might be interested to know about the 1 warning sign that our analysis has discovered.

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. 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.