Xvivo Perfusion (STO:XVIVO) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Xvivo Perfusion (STO:XVIVO), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Xvivo Perfusion, this is the formula:

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

0.008 = kr13m ÷ (kr1.7b - kr135m) (Based on the trailing twelve months to December 2022).

Therefore, Xvivo Perfusion has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.1%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for Xvivo Perfusion.

The Trend Of ROCE

On the surface, the trend of ROCE at Xvivo Perfusion doesn't inspire confidence. Around five years ago the returns on capital were 1.4%, but since then they've fallen to 0.8%. 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.

The Bottom Line On Xvivo Perfusion's ROCE

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. And long term investors must be optimistic going forward because the stock has returned a huge 202% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for Xvivo Perfusion that we think you should be aware of.

While Xvivo Perfusion isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.