Capital Allocation Trends At Baxter International (NYSE:BAX) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Baxter International (NYSE:BAX), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Baxter International:

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

0.069 = US$1.5b ÷ (US$28b - US$6.5b) (Based on the trailing twelve months to December 2023).

Thus, Baxter International has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.6%.

Check out our latest analysis for Baxter International

Above you can see how the current ROCE for Baxter International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Baxter International .

What Does the ROCE Trend For Baxter International Tell Us?

When we looked at the ROCE trend at Baxter International, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 6.9%. However it looks like Baxter International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Baxter International's ROCE

To conclude, we've found that Baxter International is reinvesting in the business, but returns have been falling. Since the stock has declined 41% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Baxter International has the makings of a multi-bagger.

If you'd like to know more about Baxter International, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.