If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at LeMaitre Vascular (NASDAQ:LMAT) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for LeMaitre Vascular, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = US$31m ÷ (US$326m - US$26m) (Based on the trailing twelve months to June 2023).
So, LeMaitre Vascular has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.7%.
View our latest analysis for LeMaitre Vascular
In the above chart we have measured LeMaitre Vascular's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is LeMaitre Vascular's ROCE Trending?
On the surface, the trend of ROCE at LeMaitre Vascular doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 10%. 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 On LeMaitre Vascular's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that LeMaitre Vascular is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 112% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
LeMaitre Vascular 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 LeMaitre Vascular isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.