Stock Analysis

Returns On Capital At Repro Med Systems (NASDAQ:KRMD) Paint An Interesting Picture

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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. Although, when we looked at Repro Med Systems (NASDAQ:KRMD), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Repro Med Systems, this is the formula:

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

0.08 = US$3.2m ÷ (US$45m - US$5.4m) (Based on the trailing twelve months to September 2020).

So, Repro Med Systems has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 10.0%.

View our latest analysis for Repro Med Systems

NasdaqCM:KRMD Return on Capital Employed January 27th 2021

Above you can see how the current ROCE for Repro Med Systems 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 Repro Med Systems here for free.

What Does the ROCE Trend For Repro Med Systems Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 15% five years ago, while capital employed has grown 479%. That being said, Repro Med Systems raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Repro Med Systems might not have received a full period of earnings contribution from it. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Key Takeaway

While returns have fallen for Repro Med Systems in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 830% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Repro Med Systems does have some risks though, and we've spotted 2 warning signs for Repro Med Systems that you might be interested in.

While Repro Med Systems 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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