If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at Zimmer Biomet Holdings (NYSE:ZBH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is 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. 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)
0.072 = US$1.4b ÷ (US$21b - US$2.5b) (Based on the trailing twelve months to June 2022).
So, Zimmer Biomet Holdings has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.3%.
Above you can see how the current ROCE for Zimmer Biomet Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Zimmer Biomet Holdings here for free.
What Does the ROCE Trend For Zimmer Biomet Holdings Tell Us?
Over the past five years, Zimmer Biomet Holdings' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're 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.
Our Take On Zimmer Biomet Holdings' ROCE
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. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 3 warning signs for Zimmer Biomet Holdings you'll probably want to know about.
While Zimmer Biomet Holdings 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.
What are the risks and opportunities for Zimmer Biomet Holdings?
Earnings are forecast to grow 21.48% per year
Profit margins (4.1%) are lower than last year (11.7%)
Large one-off items impacting financial results
Has a high level of debt
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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.
Zimmer Biomet Holdings
Zimmer Biomet Holdings, Inc., together with its subsidiaries, operates in the musculoskeletal healthcare business in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
Adequate balance sheet with moderate growth potential.