What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ypsomed Holding (VTX:YPSN) looks quite promising in regards to its trends of return on capital.
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 Ypsomed Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = CHF97m ÷ (CHF1.2b - CHF513m) (Based on the trailing twelve months to September 2024).
So, Ypsomed Holding has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.
Check out our latest analysis for Ypsomed Holding
In the above chart we have measured Ypsomed Holding'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 analyst report for Ypsomed Holding .
How Are Returns Trending?
Investors would be pleased with what's happening at Ypsomed Holding. Over the last five years, returns on capital employed have risen substantially to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 69% more capital is being employed now too. So we're very much inspired by what we're seeing at Ypsomed Holding thanks to its ability to profitably reinvest capital.
On a side note, Ypsomed Holding's current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ypsomed Holding has. And a remarkable 176% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.