There Are Reasons To Feel Uneasy About Xvivo Perfusion's (STO:XVIVO) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Xvivo Perfusion (STO:XVIVO), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Xvivo Perfusion:

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

0.002 = kr4.2m ÷ (kr2.2b - kr134m) (Based on the trailing twelve months to December 2023).

So, Xvivo Perfusion has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.9%.

View our latest analysis for Xvivo Perfusion

Above you can see how the current ROCE for Xvivo Perfusion compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Xvivo Perfusion .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Xvivo Perfusion doesn't inspire confidence. To be more specific, ROCE has fallen from 2.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Xvivo Perfusion is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 64% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.