Investors Could Be Concerned With NuVasive's (NASDAQ:NUVA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at NuVasive (NASDAQ:NUVA) 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)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for NuVasive:

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

0.034 = US$67m ÷ (US$2.1b - US$195m) (Based on the trailing twelve months to September 2021).

Therefore, NuVasive has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.2%.

View our latest analysis for NuVasive

In the above chart we have measured NuVasive's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is NuVasive's ROCE Trending?

In terms of NuVasive's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.4% from 8.1% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On NuVasive's ROCE

To conclude, we've found that NuVasive is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think NuVasive has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for NuVasive that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.