Xvivo Perfusion (STO:XVIVO) Might Be Having Difficulty Using Its Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Xvivo Perfusion (STO:XVIVO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for Xvivo Perfusion:

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

0.0041 = kr6.2m ÷ (kr1.6b - kr77m) (Based on the trailing twelve months to June 2022).

Thus, Xvivo Perfusion has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.3%.

View our latest analysis for Xvivo Perfusion

In the above chart we have measured Xvivo Perfusion's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Xvivo Perfusion Tell Us?

In terms of Xvivo Perfusion's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 0.7%, but since then they've fallen to 0.4%. 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.

What We Can Learn From Xvivo Perfusion's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Xvivo Perfusion. And long term investors must be optimistic going forward because the stock has returned a huge 108% to shareholders in the last five years. 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 2 warning signs with Xvivo Perfusion and understanding these 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.