Returns Are Gaining Momentum At Accuray (NASDAQ:ARAY)

Simply Wall St
January 08, 2022
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Accuray's (NASDAQ:ARAY) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Accuray, this is the formula:

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

0.067 = US$19m ÷ (US$476m - US$188m) (Based on the trailing twelve months to September 2021).

Therefore, Accuray has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.2%.

See our latest analysis for Accuray

NasdaqGS:ARAY Return on Capital Employed January 8th 2022

Above you can see how the current ROCE for Accuray 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 report on analyst forecasts for the company.

What Can We Tell From Accuray's ROCE Trend?

We're delighted to see that Accuray 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 6.7% on its capital. While returns have increased, the amount of capital employed by Accuray has remained flat over the period. 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. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

To bring it all together, Accuray has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 21% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Accuray does have some risks though, and we've spotted 2 warning signs for Accuray that you might be interested in.

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.