We Like These Underlying Return On Capital Trends At Carl Zeiss Meditec (ETR:AFX)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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 Carl Zeiss Meditec (ETR:AFX) 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. To calculate this metric for Carl Zeiss Meditec, this is the formula:

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

0.16 = €366m ÷ (€2.7b - €493m) (Based on the trailing twelve months to March 2023).

Thus, Carl Zeiss Meditec has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 10% it's much better.

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'd like, you can check out the forecasts from the analysts covering Carl Zeiss Meditec here for free.

SWOT Analysis for Carl Zeiss Meditec

What Can We Tell From Carl Zeiss Meditec's ROCE Trend?

The trends we've noticed at Carl Zeiss Meditec are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. So we're very much inspired by what we're seeing at Carl Zeiss Meditec thanks to its ability to profitably reinvest capital.

The Bottom Line On Carl Zeiss Meditec's ROCE

To sum it up, Carl Zeiss Meditec has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 96% 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. In light of that, we think it's worth looking further into this stock because if Carl Zeiss Meditec can keep these trends up, it could have a bright future ahead.

While Carl Zeiss Meditec looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether AFX is currently trading for a fair price.

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.