Returns At Quipt Home Medical (TSE:QIPT) Are On The Way Up

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Quipt Home Medical (TSE:QIPT) so let's look a bit deeper.

What Is 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 Quipt Home Medical is:

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

0.022 = US$4.1m ÷ (US$249m - US$64m) (Based on the trailing twelve months to March 2024).

Thus, Quipt Home Medical has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 16%.

Check out our latest analysis for Quipt Home Medical

In the above chart we have measured Quipt Home Medical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Quipt Home Medical .

The Trend Of ROCE

We're delighted to see that Quipt Home Medical is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.2% on its capital. Not only that, but the company is utilizing 491% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Quipt Home Medical has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Overall, Quipt Home Medical gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 53% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Quipt Home Medical looks impressive, no company is worth an infinite price. The intrinsic value infographic for QIPT helps visualize whether it is currently trading for a fair price.

While Quipt Home Medical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com