Zimmer Biomet Holdings (NYSE:ZBH) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Zimmer Biomet Holdings (NYSE:ZBH) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.069 = US$1.3b ÷ (US$22b - US$2.7b) (Based on the trailing twelve months to March 2022).

So, Zimmer Biomet Holdings has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.9%.

Check out our latest analysis for Zimmer Biomet Holdings

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Zimmer Biomet Holdings' ROCE Trend?

We're a bit concerned with the trends, because the business is applying 22% less capital than it was five years ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

The Bottom Line On Zimmer Biomet Holdings' ROCE

It's a shame to see that Zimmer Biomet Holdings is effectively shrinking in terms of its capital base. Since the stock has declined 15% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you'd like to know about the risks facing Zimmer Biomet Holdings, we've discovered 4 warning signs that you should be aware of.

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.

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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.