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. Although, when we looked at Zimmer Biomet Holdings (NYSE:ZBH), it didn't seem to tick all of these boxes.
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 Zimmer Biomet Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = US$1.3b ÷ (US$21b - US$2.3b) (Based on the trailing twelve months to September 2022).
Therefore, Zimmer Biomet Holdings has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 11%.
See our latest analysis for Zimmer Biomet Holdings
NYSE:ZBH Return on Capital Employed February 3rd 2023
In the above chart we have measured Zimmer Biomet Holdings' 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 report for Zimmer Biomet Holdings.
What Does the ROCE Trend For Zimmer Biomet Holdings Tell Us?
There hasn't been much to report for Zimmer Biomet Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Zimmer Biomet Holdings doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Zimmer Biomet Holdings' ROCE
We can conclude that in regards to Zimmer Biomet Holdings' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Like most companies, Zimmer Biomet Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.
While Zimmer Biomet Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
