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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Tactile Systems Technology (NASDAQ:TCMD) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)
0.017 = US$2.0m ÷ (US$142m – US$20m) (Based on the trailing twelve months to June 2020).
Therefore, Tactile Systems Technology has an ROCE of 1.7%. Ultimately, that’s a low return and it under-performs the Medical Equipment industry average of 9.1%.
Check out 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 report for Tactile Systems Technology.
How Are Returns Trending?
In terms of Tactile Systems Technology’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 1.7% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
In summary, despite lower returns in the short term, we’re encouraged to see that Tactile Systems Technology is reinvesting for growth and has higher sales as a result. However, total returns to shareholders over the last three years have been flat, which could indicate these growth trends potentially aren’t accounted for yet by investors. So we think it’d be worthwhile to look further into this stock given the trends look encouraging.
One more thing, we’ve spotted 2 warning signs facing Tactile Systems Technology that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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.
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