Should You Be Impressed By Masimo's (NASDAQ:MASI) Returns on Capital?

By
Simply Wall St
Published
March 15, 2021
NasdaqGS:MASI

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Masimo (NASDAQ:MASI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Masimo, this is the formula:

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

0.17 = US$255m ÷ (US$1.7b - US$234m) (Based on the trailing twelve months to January 2021).

Therefore, Masimo has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Medical Equipment industry.

View our latest analysis for Masimo

roce
NasdaqGS:MASI Return on Capital Employed March 15th 2021

In the above chart we have measured Masimo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Masimo here for free.

What Does the ROCE Trend For Masimo Tell Us?

On the surface, the trend of ROCE at Masimo doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 24% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Masimo's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Masimo. And long term investors must be optimistic going forward because the stock has returned a huge 478% 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.

Masimo does have some risks though, and we've spotted 1 warning sign for Masimo that you might be interested in.

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. 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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