Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So while PULSION Medical Systems (MUN:PUS) has a high ROCE right now, lets see what we can decipher from how returns are changing.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on PULSION Medical Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = €6.2m ÷ (€35m - €9.8m) (Based on the trailing twelve months to December 2018).
Thus, PULSION Medical Systems has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating PULSION Medical Systems' past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From PULSION Medical Systems' ROCE Trend?
On the surface, the trend of ROCE at PULSION Medical Systems doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 58%. However it looks like PULSION Medical Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in recent times. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On PULSION Medical Systems' ROCE
In summary, PULSION Medical Systems is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 3.5% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
If you'd like to know about the risks facing PULSION Medical Systems, we've discovered 2 warning signs that you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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