- United States
- Medical Equipment
Returns On Capital Signal Tricky Times Ahead For Teleflex (NYSE:TFX)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Teleflex (NYSE:TFX), it didn't seem to tick all of these boxes.
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 Teleflex, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.077 = US$507m ÷ (US$7.1b - US$527m) (Based on the trailing twelve months to June 2021).
Thus, Teleflex has an ROCE of 7.7%. On its own, that's a low figure but it's around the 8.7% average generated by the Medical Equipment industry.
Check out 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.
How Are Returns Trending?
On the surface, the trend of ROCE at Teleflex doesn't inspire confidence. Around five years ago the returns on capital were 10.0%, but since then they've fallen to 7.7%. 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 may take some time before the company starts to see any change in earnings from these investments.
Our Take On Teleflex's ROCE
Bringing it all together, while we're somewhat encouraged by Teleflex's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 112% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 2 warning signs for Teleflex you'll probably want to know about.
While Teleflex 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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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.
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Teleflex Incorporated designs, develops, manufactures, and supplies single-use medical devices for common diagnostic and therapeutic procedures in critical care and surgical applications worldwide.
Excellent balance sheet and good value.