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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. So when we looked at DexCom (NASDAQ:DXCM) and its trend of ROCE, we really liked what we saw.
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 DexCom, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = US$312m ÷ (US$4.4b - US$604m) (Based on the trailing twelve months to March 2021).
Thus, DexCom has an ROCE of 8.2%. On its own, that's a low figure but it's around the 8.7% average generated by the Medical Equipment industry.
Above you can see how the current ROCE for DexCom compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for DexCom.
What Does the ROCE Trend For DexCom Tell Us?
DexCom has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 8.2% on its capital. And unsurprisingly, like most companies trying to break into the black, DexCom is utilizing 1,507% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On DexCom's ROCE
In summary, it's great to see that DexCom has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 451% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you'd like to know more about DexCom, we've spotted 4 warning signs, and 1 of them can't be ignored.
While DexCom isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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