Returns Are Gaining Momentum At Tandem Diabetes Care (NASDAQ:TNDM)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at Tandem Diabetes Care (NASDAQ:TNDM) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Tandem Diabetes Care is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = US$29m ÷ (US$850m - US$120m) (Based on the trailing twelve months to September 2021).
Therefore, Tandem Diabetes Care has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.2%.
Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Tandem Diabetes Care.
What Does the ROCE Trend For Tandem Diabetes Care Tell Us?
Tandem Diabetes Care has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Tandem Diabetes Care is utilizing 1,210% 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.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 14%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
In Conclusion...
To the delight of most shareholders, Tandem Diabetes Care has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Tandem Diabetes Care can keep these trends up, it could have a bright future ahead.
On a separate note, we've found 1 warning sign for Tandem Diabetes Care you'll probably want to know about.
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.
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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.
