Returns On Capital Signal Tricky Times Ahead For Ambu (CPH:AMBU B)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Ambu (CPH:AMBU B) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Ambu:

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

0.06 = kr.360m ÷ (kr.6.8b - kr.847m) (Based on the trailing twelve months to December 2023).

Therefore, Ambu has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.5%.

Check out our latest analysis for Ambu

In the above chart we have measured Ambu'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 Ambu .

What Does the ROCE Trend For Ambu Tell Us?

On the surface, the trend of ROCE at Ambu doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Ambu might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Ambu's ROCE

Bringing it all together, while we're somewhat encouraged by Ambu's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. 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.

Like most companies, Ambu does come with some risks, and we've found 1 warning sign that you should be aware of.

While Ambu 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.