Stock Analysis

Returns At Zimmer Biomet Holdings (NYSE:ZBH) Appear To Be Weighed Down

  •  Updated
NYSE:ZBH
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Zimmer Biomet Holdings (NYSE:ZBH), 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. To calculate this metric for Zimmer Biomet Holdings, this is the formula:

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

0.063 = US$1.3b ÷ (US$24b - US$2.9b) (Based on the trailing twelve months to June 2021).

Thus, Zimmer Biomet Holdings has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.8%.

View our latest analysis for Zimmer Biomet Holdings

roce
NYSE:ZBH Return on Capital Employed September 1st 2021

In the above chart we have measured Zimmer Biomet Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Zimmer Biomet Holdings here for free.

How Are Returns Trending?

There hasn't been much to report for Zimmer Biomet Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Zimmer Biomet Holdings to be a multi-bagger going forward.

The Bottom Line

In a nutshell, Zimmer Biomet Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 20% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Zimmer Biomet Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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