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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at TransMedics Group (NASDAQ:TMDX) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 TransMedics Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$28m ÷ (US$759m - US$54m) (Based on the trailing twelve months to June 2024).
Therefore, TransMedics Group has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.2%.
View our latest analysis for TransMedics Group
In the above chart we have measured TransMedics Group's 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 TransMedics Group for free.
What The Trend Of ROCE Can Tell Us
TransMedics Group has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.0% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, TransMedics Group is utilizing 567% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Overall, TransMedics Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. 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 TransMedics Group can keep these trends up, it could have a bright future ahead.
On a final note, we found 4 warning signs for TransMedics Group (2 are potentially serious) you should be aware of.