We Think Shockwave Medical (NASDAQ:SWAV) Might Have The DNA Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Shockwave Medical's (NASDAQ:SWAV) look very promising so lets take a look.

What Is 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. The formula for this calculation on Shockwave Medical is:

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

0.23 = US$149m ÷ (US$783m - US$142m) (Based on the trailing twelve months to March 2023).

Thus, Shockwave Medical has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 9.1%.

View our latest analysis for Shockwave Medical

In the above chart we have measured Shockwave Medical'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.

SWOT Analysis for Shockwave Medical

What Can We Tell From Shockwave Medical's ROCE Trend?

We're delighted to see that Shockwave Medical is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 23% on its capital. And unsurprisingly, like most companies trying to break into the black, Shockwave Medical is utilizing 1,130% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

What We Can Learn From Shockwave Medical's ROCE

Overall, Shockwave Medical gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 532% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Shockwave Medical can keep these trends up, it could have a bright future ahead.

Shockwave Medical does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

Shockwave Medical is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.