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Capital Allocation Trends At ICU Medical (NASDAQ:ICUI) Aren't Ideal

·2 min read

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at ICU Medical (NASDAQ:ICUI), 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. Analysts use this formula to calculate it for ICU Medical:

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

0.079 = US$126m ÷ (US$1.8b - US$180m) (Based on the trailing twelve months to March 2021).

So, ICU Medical has an ROCE of 7.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

Check out our latest analysis for ICU Medical


Above you can see how the current ROCE for ICU Medical 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 ICU Medical here for free.

So How Is ICU Medical's ROCE Trending?

When we looked at the ROCE trend at ICU Medical, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.9% from 15% five years ago. However it looks like ICU Medical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by ICU Medical's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 90% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing ICU Medical, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.