What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So, when we ran our eye over ICU Medical's (NASDAQ:ICUI) trend of ROCE, we liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ICU Medical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$155m ÷ (US$1.9b - US$359m) (Based on the trailing twelve months to June 2020).
Thus, ICU Medical has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Medical Equipment industry.
Above you can see how the current ROCE for ICU Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ICU Medical here for free.
So How Is ICU Medical's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 177% in that time. 10% is a pretty standard return, and it provides some comfort knowing that ICU Medical has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 19% of total assets, this reported ROCE would probably be less than10% because total capital employed would be higher.The 10% ROCE could be even lower if current liabilities weren't 19% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
What We Can Learn From ICU Medical's ROCE
To sum it up, ICU Medical has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
One more thing to note, we've identified 2 warning signs with ICU Medical and understanding these should be part of your investment process.
While ICU Medical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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