What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Zimmer Biomet Holdings (NYSE:ZBH), the trends above didn't look too great.
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. The formula for this calculation on Zimmer Biomet Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$947m ÷ (US$24b - US$2.1b) (Based on the trailing twelve months to March 2021).
Therefore, Zimmer Biomet Holdings has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.4%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
There is reason to be cautious about Zimmer Biomet Holdings, given the returns are trending downwards. About five years ago, returns on capital were 7.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zimmer Biomet Holdings becoming one if things continue as they have.
In summary, it's unfortunate that Zimmer Biomet Holdings is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 42% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Zimmer Biomet Holdings (of which 1 makes us a bit uncomfortable!) that you should 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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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
This article by Simply Wall St is general in nature. 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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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.