PULSION Medical Systems (MUN:PUS) May Have Issues Allocating Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within PULSION Medical Systems (MUN:PUS), we weren't too hopeful.

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 PULSION Medical Systems, this is the formula:

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

0.20 = €4.8m ÷ (€31m - €6.6m) (Based on the trailing twelve months to December 2019).

Thus, PULSION Medical Systems has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 14% it's much better.

Check out our latest analysis for PULSION Medical Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for PULSION Medical Systems' ROCE against it's prior returns. If you're interested in investigating PULSION Medical Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of PULSION Medical Systems' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 26% five years ago but has since fallen to 20%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 26% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

In Conclusion...

To see PULSION Medical Systems reducing the capital employed in the business in tandem with diminishing returns, is concerning. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for PULSION Medical Systems that we think you should be aware of.

While PULSION Medical Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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