Be Wary Of Atrion (NASDAQ:ATRI) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Atrion (NASDAQ:ATRI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Atrion, this is the formula:

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

0.16 = US$40m ÷ (US$265m - US$18m) (Based on the trailing twelve months to December 2022).

So, Atrion has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Medical Equipment industry.

See our latest analysis for Atrion

Historical performance is a great place to start when researching a stock so above you can see the gauge for Atrion's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Atrion, check out these free graphs here.

What Can We Tell From Atrion's ROCE Trend?

In terms of Atrion's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Atrion is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 0.6% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 2 warning signs with Atrion and understanding these should be part of your investment process.

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

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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.