What are the first trends to look for to identify a security that could increase in value over the long term? A common approach is to try to find a business with Return on capital employed (ROCE) which is increasing, in parallel with a amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. In light of this, when we looked Teleflex (NYSE: TFX) and its ROCE trend, we weren’t exactly thrilled.
What is Return on Capital Employed (ROCE)?
For those unsure of what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Teleflex:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.067 = $ 436 million ÷ ($ 7.0 billion – $ 508 million) (Based on the last twelve months up to March 2021).
So, Teleflex has a ROCE of 6.7%. In the end, it’s a poor performance and it underperforms the medical equipment industry average by 8.4%.
See our latest review for Teleflex
Above you can see how Teleflex’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Teleflex.
So what’s the ROCE trend for Teleflex?
When it comes to Teleflex’s historic ROCE movements, the trend is not great. Over the past five years, the return on capital has fallen to 6.7% from 10% five years ago. Meanwhile, the company is using more capital, but that hasn’t changed much in terms of sales over the past 12 months, which may reflect longer-term investments. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
The bottom line
To conclude, we found that Teleflex is reinvesting in the business, but the returns are declining. Investors must think there are better things to come because the stock has kicked it out of the park, offering a 155% gain to shareholders who have owned in the past five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath that this is a multi-bagger in the future.
On a separate note, we found 2 warning signs for Teleflex you will probably want to know.
If you want to look for strong businesses with significant income, check out this free list of companies with good balance sheets and impressive returns on equity.
If you want to trade Teleflex, open an account with the cheapest * professionally approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
*Interactive Brokers ranked Least Expensive Broker by StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. Otherwise, email the editorial team (at) simplywallst.com