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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Zimmer Biomet Holdings (NYSE:ZBH) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Zimmer Biomet Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = US$1.6b ÷ (US$21b - US$2.5b) (Based on the trailing twelve months to December 2024).
Therefore, Zimmer Biomet Holdings has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 10%.
See our latest analysis for Zimmer Biomet Holdings
Above you can see how the current ROCE for Zimmer Biomet Holdings 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 Zimmer Biomet Holdings .
What The Trend Of ROCE Can Tell Us
Zimmer Biomet Holdings' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 29% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line
In summary, we're delighted to see that Zimmer Biomet Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 23% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.