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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Merit Medical Systems' (NASDAQ:MMSI) returns on capital, so let's have a look.
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 Merit Medical Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$153m ÷ (US$2.4b - US$201m) (Based on the trailing twelve months to September 2024).
Therefore, Merit Medical Systems has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.6%.
See our latest analysis for Merit Medical Systems
In the above chart we have measured Merit Medical Systems' 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 Merit Medical Systems for free.
What Can We Tell From Merit Medical Systems' ROCE Trend?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.0%. The amount of capital employed has increased too, by 35%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Merit Medical Systems' ROCE
To sum it up, Merit Medical Systems has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 257% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Merit Medical Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic for MMSI helps visualize whether it is currently trading for a fair price.