DexCom's (NASDAQ:DXCM) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 DexCom's (NASDAQ:DXCM) returns on capital, so let's have a look.

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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 DexCom:

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

0.17 = US$633m ÷ (US$6.8b - US$3.0b) (Based on the trailing twelve months to March 2025).

So, DexCom has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 11% it's much better.

See our latest analysis for DexCom

Above you can see how the current ROCE for DexCom 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 DexCom .

The Trend Of ROCE

The trends we've noticed at DexCom are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 76%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 45% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

All in all, it's terrific to see that DexCom is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 18% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

While DexCom looks impressive, no company is worth an infinite price. The intrinsic value infographic for DXCM helps visualize whether it is currently trading for a fair price.

While DexCom 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.