U.S. markets close in 3 hours 13 minutes
  • S&P 500

    3,767.74
    -57.59 (-1.51%)
     
  • Dow 30

    30,512.82
    -584.44 (-1.88%)
     
  • Nasdaq

    11,105.49
    -22.35 (-0.20%)
     
  • Russell 2000

    1,711.36
    -16.40 (-0.95%)
     
  • Crude Oil

    99.69
    -8.74 (-8.06%)
     
  • Gold

    1,766.90
    -34.60 (-1.92%)
     
  • Silver

    19.13
    -0.54 (-2.73%)
     
  • EUR/USD

    1.0245
    -0.0179 (-1.72%)
     
  • 10-Yr Bond

    2.7950
    -0.0940 (-3.25%)
     
  • GBP/USD

    1.1924
    -0.0180 (-1.49%)
     
  • USD/JPY

    135.7890
    +0.1290 (+0.10%)
     
  • BTC-USD

    19,575.82
    -127.35 (-0.65%)
     
  • CMC Crypto 200

    423.92
    -16.10 (-3.66%)
     
  • FTSE 100

    7,025.47
    -207.18 (-2.86%)
     
  • Nikkei 225

    26,423.47
    +269.66 (+1.03%)
     

Returns on Capital Paint A Bright Future For ResMed (NYSE:RMD)

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·2 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of ResMed (NYSE:RMD) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on ResMed is:

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

0.23 = US$963m ÷ (US$4.7b - US$624m) (Based on the trailing twelve months to September 2021).

Therefore, ResMed has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.

View our latest analysis for ResMed

roce
roce

Above you can see how the current ROCE for ResMed compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For ResMed Tell Us?

We like the trends that we're seeing from ResMed. The data shows that returns on capital have increased substantially over the last five years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 52% 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.

The Key Takeaway

To sum it up, ResMed has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 257% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if ResMed can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for ResMed that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.