Returns On Capital At Merit Medical Systems (NASDAQ:MMSI) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 Merit Medical Systems (NASDAQ:MMSI) 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. The formula for this calculation on Merit Medical Systems is:

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

0.071 = US$102m ÷ (US$1.7b - US$221m) (Based on the trailing twelve months to December 2022).

So, Merit Medical Systems has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.9%.

See our latest analysis for Merit Medical Systems

In the above chart we have measured Merit Medical Systems' 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 Merit Medical Systems.

The Trend Of ROCE

In terms of Merit Medical Systems' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.1% for the last five years, and the capital employed within the business has risen 45% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Merit Medical Systems' ROCE

In conclusion, Merit Medical Systems has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 63% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Merit Medical Systems does come with some risks, and we've found 1 warning sign that you should be aware of.

While Merit Medical 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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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.