Returns On Capital Signal Tricky Times Ahead For Teleflex (NYSE:TFX)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Teleflex (NYSE:TFX) and its ROCE trend, we weren't exactly thrilled.

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 Teleflex:

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

0.067 = US$436m ÷ (US$7.0b - US$508m) (Based on the trailing twelve months to March 2021).

Thus, Teleflex has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.

See our latest analysis for Teleflex

Above you can see how the current ROCE for Teleflex 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 Teleflex.

So How Is Teleflex's ROCE Trending?

In terms of Teleflex's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.7% from 10% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

The Bottom Line

To conclude, we've found that Teleflex is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 155% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Teleflex you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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