There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Globus Medical (NYSE:GMED) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
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 Globus Medical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$236m ÷ (US$2.1b – US$159m) (Based on the trailing twelve months to December 2022).
So, Globus Medical has an ROCE of 12%. In absolute terms, that’s a satisfactory return, but compared to the Medical Equipment industry average of 9.9% it’s much better.
See our latest analysis for Globus Medical
Above you can see how the current ROCE for Globus Medical compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for Globus Medical
- Earnings growth over the past year exceeded the industry.
- Expensive based on P/E ratio and estimated fair value.
- Annual revenue is forecast to grow faster than the American market.
- Annual earnings are forecast to grow slower than the American market.
The Trend Of ROCE
On the surface, the trend of ROCE at Globus Medical doesn’t inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Globus Medical’s ROCE
To conclude, we’ve found that Globus Medical is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 13% to shareholders over the last five years. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Globus Medical could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While Globus Medical may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
What are the risks and opportunities for Globus Medical?
Price-To-Earnings ratio (28x) is below the Medical Equipment industry average (36.3x)
Earnings are forecast to grow 13.14% per year
Earnings grew by 41.8% over the past year
No risks detected for GMED from our risks checks.
View all Risks and Rewards
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.