U.S. markets closed
  • S&P Futures

    3,732.25
    +0.25 (+0.01%)
     
  • Dow Futures

    29,748.00
    -2.00 (-0.01%)
     
  • Nasdaq Futures

    11,548.00
    -7.75 (-0.07%)
     
  • Russell 2000 Futures

    1,721.90
    +1.10 (+0.06%)
     
  • Crude Oil

    81.75
    -0.40 (-0.49%)
     
  • Gold

    1,661.80
    -8.20 (-0.49%)
     
  • Silver

    18.80
    -0.08 (-0.45%)
     
  • EUR/USD

    0.9700
    -0.0039 (-0.40%)
     
  • 10-Yr Bond

    3.7050
    -0.2590 (-6.53%)
     
  • Vix

    30.18
    -2.42 (-7.42%)
     
  • GBP/USD

    1.0809
    -0.0076 (-0.70%)
     
  • USD/JPY

    144.3770
    +0.2550 (+0.18%)
     
  • BTC-USD

    19,435.89
    +302.37 (+1.58%)
     
  • CMC Crypto 200

    443.56
    +14.78 (+3.45%)
     
  • FTSE 100

    7,005.39
    +20.80 (+0.30%)
     
  • Nikkei 225

    26,425.97
    +251.99 (+0.96%)
     

Merit Medical Systems' (NASDAQ:MMSI) Returns On Capital Are Heading Higher

·3 min read

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Merit Medical Systems (NASDAQ:MMSI) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Merit Medical Systems, this is the formula:

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

0.086 = US$124m ÷ (US$1.6b - US$196m) (Based on the trailing twelve months to June 2022).

Thus, Merit Medical Systems has an ROCE of 8.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.2%.

See our latest analysis for Merit Medical Systems

roce
roce

In the above chart we have measured Merit Medical Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Merit Medical Systems here for free.

What Can We Tell From Merit Medical Systems' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 53% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Merit Medical Systems' ROCE

In summary, it's great to see that Merit Medical Systems can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 38% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to continue researching Merit Medical Systems, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here