What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think DENTSPLY SIRONA (NASDAQ:XRAY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for DENTSPLY SIRONA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$290m ÷ (US$7.2b - US$1.2b) (Based on the trailing twelve months to September 2023).
Thus, DENTSPLY SIRONA has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.3%.
View our latest analysis for DENTSPLY SIRONA
In the above chart we have measured DENTSPLY SIRONA'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.
How Are Returns Trending?
We're a bit concerned with the trends, because the business is applying 22% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 4.8%, it's hard to get excited about these developments.
The Bottom Line On DENTSPLY SIRONA's ROCE
Overall, we're not ecstatic to see DENTSPLY SIRONA reducing the amount of capital it employs in the business. Since the stock has declined 13% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a final note, we've found 1 warning sign for DENTSPLY SIRONA that we think you should be aware of.
While DENTSPLY SIRONA 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.