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Are ICU Medical, Inc.’s (NASDAQ:ICUI) High Returns Really That Great?

Thomas Auclair

Today we are going to look at ICU Medical, Inc. (NASDAQ:ICUI) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for ICU Medical:

0.19 = US$137m ÷ (US$1.5b – US$203m) (Based on the trailing twelve months to September 2018.)

So, ICU Medical has an ROCE of 19%.

Check out our latest analysis for ICU Medical

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Does ICU Medical Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that ICU Medical’s ROCE is meaningfully better than the 11% average in the Medical Equipment industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from ICU Medical’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, ICU Medical’s ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 13%. This makes us think about whether the company has been reinvesting shrewdly.

NasdaqGS:ICUI Last Perf January 11th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for ICU Medical.

ICU Medical’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

ICU Medical has total liabilities of US$203m and total assets of US$1.5b. As a result, its current liabilities are equal to approximately 13% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On ICU Medical’s ROCE

Overall, ICU Medical has a decent ROCE and could be worthy of further research. You might be able to find a better buy than ICU Medical. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like ICU Medical better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.