IRadimed (NASDAQ:IRMD) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at IRadimed (NASDAQ:IRMD) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on IRadimed is:

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

0.17 = US$11m ÷ (US$72m - US$6.2m) (Based on the trailing twelve months to March 2022).

So, IRadimed has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Medical Equipment industry.

Check out our latest analysis for IRadimed

In the above chart we have measured IRadimed's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for IRadimed.

How Are Returns Trending?

When we looked at the ROCE trend at IRadimed, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 17%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From IRadimed's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that IRadimed is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 339% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching IRadimed, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.