Globus Medical (NYSE:GMED) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
May 24, 2022
NYSE:GMED
Source: Shutterstock

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Globus Medical (NYSE:GMED), we don't think it's current trends fit the mold of a multi-bagger.

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 Globus Medical:

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

0.10 = US$189m ÷ (US$2.0b - US$141m) (Based on the trailing twelve months to March 2022).

So, Globus Medical has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Medical Equipment industry average of 8.5%.

Check out our latest analysis for Globus Medical

roce
NYSE:GMED Return on Capital Employed May 24th 2022

Above you can see how the current ROCE for Globus Medical 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 report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Globus Medical, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 10%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Globus Medical is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 114% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you're still interested in Globus Medical it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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

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