Utah Medical Products (NASDAQ:UTMD) Will Want To Turn Around Its Return Trends
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Utah Medical Products (NASDAQ:UTMD), we don't think it's current trends fit the mold of a multi-bagger.
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 Utah Medical Products is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$19m ÷ (US$116m - US$3.7m) (Based on the trailing twelve months to December 2021).
Thus, Utah Medical Products has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 8.2% it's much better.
See our latest analysis for Utah Medical Products
Historical performance is a great place to start when researching a stock so above you can see the gauge for Utah Medical Products' ROCE against it's prior returns. If you'd like to look at how Utah Medical Products has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Utah Medical Products Tell Us?
On the surface, the trend of ROCE at Utah Medical Products doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On Utah Medical Products' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Utah Medical Products is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 54% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
Utah Medical Products could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Utah Medical Products 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.