To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at ICU Medical (NASDAQ:ICUI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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. To calculate this metric for ICU Medical, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = US$147m ÷ (US$1.7b - US$185m) (Based on the trailing twelve months to September 2020).
Thus, ICU Medical has an ROCE of 9.5%. Even though it's in line with the industry average of 10.0%, it's still a low return by itself.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
In terms of ICU Medical's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 13%, but since then they've fallen to 9.5%. However it looks like ICU Medical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
To conclude, we've found that ICU Medical is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 129% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing to note, we've identified 1 warning sign with ICU Medical and understanding this should be part of your investment process.
While ICU Medical 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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