Returns On Capital Signal Tricky Times Ahead For Atrion (NASDAQ:ATRI)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Atrion (NASDAQ:ATRI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on Atrion is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$39m ÷ (US$272m - US$18m) (Based on the trailing twelve months to September 2022).
Therefore, Atrion has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Medical Equipment industry.
See our latest analysis for Atrion
Historical performance is a great place to start when researching a stock so above you can see the gauge for Atrion's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Atrion, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Atrion, we didn't gain much confidence. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Atrion's ROCE
While returns have fallen for Atrion in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a separate note, we've found 1 warning sign for Atrion you'll probably want to know about.
While Atrion 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.
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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.
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