Investors Met With Slowing Returns on Capital At Embla Medical hf (CPH:EMBLA)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Embla Medical hf (CPH:EMBLA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Embla Medical hf, this is the formula:

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

0.086 = US$114m ÷ (US$1.5b - US$209m) (Based on the trailing twelve months to December 2024).

Thus, Embla Medical hf has an ROCE of 8.6%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

View our latest analysis for Embla Medical hf

In the above chart we have measured Embla Medical hf'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 Embla Medical hf .

How Are Returns Trending?

In terms of Embla Medical hf's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.6% for the last five years, and the capital employed within the business has risen 40% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, Embla Medical hf has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 25% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you're still interested in Embla Medical hf it's worth checking out our FREE intrinsic value approximation for EMBLA to see if it's trading at an attractive price in other respects.

While Embla Medical hf 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.