Returns Are Gaining Momentum At TransMedics Group (NASDAQ:TMDX)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, TransMedics Group (NASDAQ:TMDX) looks quite promising in regards to its trends of return on capital.

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 TransMedics Group:

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

0.04 = US$28m ÷ (US$759m - US$54m) (Based on the trailing twelve months to June 2024).

Therefore, TransMedics Group has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.6%.

Check out our latest analysis for TransMedics Group

In the above chart we have measured TransMedics Group's 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 analyst report for TransMedics Group .

How Are Returns Trending?

We're delighted to see that TransMedics Group is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.0% on its capital. Not only that, but the company is utilizing 567% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

What We Can Learn From TransMedics Group's ROCE

To the delight of most shareholders, TransMedics Group has now broken into profitability. And a remarkable 556% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

TransMedics Group does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are concerning...

While TransMedics Group 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.