Returns On Capital Are Showing Encouraging Signs At Tandem Diabetes Care (NASDAQ:TNDM)
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Tandem Diabetes Care (NASDAQ:TNDM) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. Analysts use this formula to calculate it for Tandem Diabetes Care:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0037 = US$2.4m ÷ (US$754m - US$103m) (Based on the trailing twelve months to March 2021).
So, Tandem Diabetes Care has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.7%.
See our latest analysis for Tandem Diabetes Care
In the above chart we have measured Tandem Diabetes Care'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 Tandem Diabetes Care here for free.
How Are Returns Trending?
The fact that Tandem Diabetes Care is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Tandem Diabetes Care is utilizing 580% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Tandem Diabetes Care's ROCE
Long story short, we're delighted to see that Tandem Diabetes Care's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 13% 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. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you'd like to know about the risks facing Tandem Diabetes Care, we've discovered 2 warning signs that you should be aware of.
While Tandem Diabetes Care 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.
This article by Simply Wall St is general in nature. 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.
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