Qatari German Company for Medical Devices (Q.P.S.C.) (DSM:QGMD) Might Have The Makings Of A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.037 = ر.ق4.8m ÷ (ر.ق188m - ر.ق58m) (Based on the trailing twelve months to September 2022).

Therefore, Qatari German Company for Medical Devices (Q.P.S.C.) has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 11%.

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

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 want to delve into the historical earnings, revenue and cash flow of Qatari German Company for Medical Devices (Q.P.S.C.), check out these free graphs here.

What Can We Tell From Qatari German Company for Medical Devices (Q.P.S.C.)'s ROCE Trend?

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. While the business was unprofitable in the past, it's now turned things around and is earning 3.7% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line On Qatari German Company for Medical Devices (Q.P.S.C.)'s ROCE

As discussed above, Qatari German Company for Medical Devices (Q.P.S.C.) appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 50% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Qatari German Company for Medical Devices (Q.P.S.C.) can keep these trends up, it could have a bright future ahead.

Qatari German Company for Medical Devices (Q.P.S.C.) does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.

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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.