Investors Will Want Qatari German Company for Medical Devices (Q.P.S.C.)'s (DSM:QGMD) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Qatari German Company for Medical Devices (Q.P.S.C.) (DSM:QGMD) and its trend of ROCE, we really liked what we saw.

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 Qatari German Company for Medical Devices (Q.P.S.C.) is:

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

0.011 = ر.ق1.6m ÷ (ر.ق191m - ر.ق52m) (Based on the trailing twelve months to June 2021).

Therefore, Qatari German Company for Medical Devices (Q.P.S.C.) has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 12%.

View our latest analysis for Qatari German Company for Medical Devices (Q.P.S.C.)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Qatari German Company for Medical Devices (Q.P.S.C.)'s ROCE against it's prior returns. If you'd like to look at how Qatari German Company for Medical Devices (Q.P.S.C.) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Qatari German Company for Medical Devices (Q.P.S.C.) is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 1.1% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 24%. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 27% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Qatari German Company for Medical Devices (Q.P.S.C.)'s ROCE

In a nutshell, we're pleased to see that Qatari German Company for Medical Devices (Q.P.S.C.) has been able to generate higher returns from less capital. And a remarkable 260% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 3 warning signs for Qatari German Company for Medical Devices (Q.P.S.C.) (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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