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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Tactile Systems Technology (NASDAQ:TCMD), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Tactile Systems Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.086 = US$22m ÷ (US$298m - US$41m) (Based on the trailing twelve months to December 2024).
Thus, Tactile Systems Technology has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 10%.
View our latest analysis for Tactile Systems Technology
Above you can see how the current ROCE for Tactile Systems Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tactile Systems Technology .
What Does the ROCE Trend For Tactile Systems Technology Tell Us?
There are better returns on capital out there than what we're seeing at Tactile Systems Technology. The company has employed 97% more capital in the last five years, and the returns on that capital have remained stable at 8.6%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Tactile Systems Technology's ROCE
In summary, Tactile Systems Technology has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 57% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a final note, we've found 2 warning signs for Tactile Systems Technology that we think you should be aware of.