Here's What's Concerning About Penumbra's (NYSE:PEN) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Penumbra (NYSE:PEN), it didn't seem to tick all of these boxes.
What Is 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. To calculate this metric for Penumbra, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$62m ÷ (US$1.5b - US$145m) (Based on the trailing twelve months to September 2023).
Therefore, Penumbra has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.3%.
Check out our latest analysis for Penumbra
Above you can see how the current ROCE for Penumbra 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 Penumbra.
How Are Returns Trending?
On the surface, the trend of ROCE at Penumbra doesn't inspire confidence. To be more specific, ROCE has fallen from 6.5% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Penumbra's ROCE
While returns have fallen for Penumbra in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 68% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing to note, we've identified 1 warning sign with Penumbra and understanding this should be part of your investment process.
While Penumbra 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.
