The Return Trends At Carl Zeiss Meditec (ETR:AFX) Look Promising
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 on that note, Carl Zeiss Meditec (ETR:AFX) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Carl Zeiss Meditec is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = €369m ÷ (€2.7b - €493m) (Based on the trailing twelve months to June 2023).
So, Carl Zeiss Meditec has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 6.5% it's much better.
See our latest analysis for Carl Zeiss Meditec
In the above chart we have measured Carl Zeiss Meditec's 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 Carl Zeiss Meditec here for free.
What Can We Tell From Carl Zeiss Meditec's ROCE Trend?
We like the trends that we're seeing from Carl Zeiss Meditec. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 66%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
All in all, it's terrific to see that Carl Zeiss Meditec is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 27% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
While Carl Zeiss Meditec isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
