Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Baxter International (NYSE:BAX), 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. The formula for this calculation on Baxter International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.074 = US$1.6b ÷ (US$28b - US$6.4b) (Based on the trailing twelve months to March 2024).
So, Baxter International has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 10%.
In the above chart we have measured Baxter International's 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 analyst report for Baxter International .
What Does the ROCE Trend For Baxter International Tell Us?
When we looked at the ROCE trend at Baxter International, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 7.4%. However it looks like Baxter International might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Baxter International's ROCE
To conclude, we've found that Baxter International is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Baxter International has the makings of a multi-bagger.
If you'd like to know more about Baxter International, we've spotted 2 warning signs, and 1 of them is significant.
While Baxter International may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.