Stock Analysis

Baxter International (NYSE:BAX) Could Be Struggling To Allocate Capital

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Baxter International (NYSE:BAX), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for Baxter International, this is the formula:

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

0.071 = US$2.1b ÷ (US$34b - US$4.2b) (Based on the trailing twelve months to December 2021).

So, Baxter International has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.1%.

Check out our latest analysis for Baxter International

NYSE:BAX Return on Capital Employed March 30th 2022

In the above chart we have measured Baxter International'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 report for Baxter International.

The Trend Of ROCE

In terms of Baxter International's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.5%, but since then they've fallen to 7.1%. 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 may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Baxter International is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 61% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 3 warning signs we've spotted with Baxter International (including 1 which doesn't sit too well with us) .

While Baxter International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Baxter International?

Baxter International Inc., through its subsidiaries, develops and provides a portfolio of healthcare products worldwide.

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  • Trading at 39.8% below our estimate of its fair value

  • Earnings are forecast to grow 64.32% per year


  • Debt is not well covered by operating cash flow

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