Stryker (NYSE:SYK) Has More To Do To Multiply In Value Going Forward

By
Simply Wall St
Published
March 18, 2022
NYSE:SYK
Source: Shutterstock

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Stryker's (NYSE:SYK) trend of ROCE, we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Stryker:

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

0.12 = US$3.7b ÷ (US$35b - US$4.5b) (Based on the trailing twelve months to December 2021).

So, Stryker has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Medical Equipment industry.

See our latest analysis for Stryker

roce
NYSE:SYK Return on Capital Employed March 18th 2022

Above you can see how the current ROCE for Stryker compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Stryker.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 12% and the business has deployed 74% more capital into its operations. 12% is a pretty standard return, and it provides some comfort knowing that Stryker has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Stryker's ROCE

The main thing to remember is that Stryker has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 112% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 2 warning signs with Stryker and understanding these should be part of your investment process.

While Stryker 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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