Capital Allocation Trends At Carl Zeiss Meditec (ETR:AFX) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Carl Zeiss Meditec (ETR:AFX), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Carl Zeiss Meditec is:

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

0.11 = €194m ÷ (€2.0b - €298m) (Based on the trailing twelve months to December 2020).

So, Carl Zeiss Meditec has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 14% generated by the Medical Equipment industry.

Check out our latest analysis for Carl Zeiss Meditec

Above you can see how the current ROCE for Carl Zeiss Meditec compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Carl Zeiss Meditec's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 11%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Carl Zeiss Meditec's ROCE

We're a bit apprehensive about Carl Zeiss Meditec because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 413%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Carl Zeiss Meditec could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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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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