Qatari German Company for Medical Devices (Q.P.S.C.) (DSM:QGMD) Shareholders Will Want The ROCE Trajectory To Continue

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Qatari German Company for Medical Devices (Q.P.S.C.) (DSM:QGMD) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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

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

0.055 = ر.ق6.2m ÷ (ر.ق186m - ر.ق74m) (Based on the trailing twelve months to March 2022).

Thus, Qatari German Company for Medical Devices (Q.P.S.C.) has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 12%.

See 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.

How Are Returns Trending?

It's great to see that Qatari German Company for Medical Devices (Q.P.S.C.) has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 5.5% which is no doubt a relief for some early shareholders. In regards to capital employed, Qatari German Company for Medical Devices (Q.P.S.C.) is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Qatari German Company for Medical Devices (Q.P.S.C.) could be selling under-performing assets since the ROCE is improving.

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. Effectively this means that suppliers or short-term creditors are now funding 40% of the business, which is more than it was five years ago. 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 summary, it's great to see that Qatari German Company for Medical Devices (Q.P.S.C.) has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Qatari German Company for Medical Devices (Q.P.S.C.) (of which 2 can't be ignored!) that you should know about.

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