Here's What's Concerning About Demant's (CPH:DEMANT) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Demant (CPH:DEMANT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Demant is:

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

0.17 = kr.3.1b ÷ (kr.30b - kr.12b) (Based on the trailing twelve months to December 2022).

So, Demant has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Medical Equipment industry.

View our latest analysis for Demant

Above you can see how the current ROCE for Demant compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Demant.

The Trend Of ROCE

When we looked at the ROCE trend at Demant, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 23% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Demant's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Demant. These growth trends haven't led to growth returns though, since the stock has fallen 11% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 1 warning sign with Demant and understanding this should be part of your investment process.

While Demant 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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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.