If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Merit Medical Systems (NASDAQ:MMSI) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Merit Medical Systems, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.07 = US$153m ÷ (US$2.4b - US$201m) (Based on the trailing twelve months to September 2024).

Therefore, Merit Medical Systems 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 8.8%.

In the above chart we have measured Merit Medical Systems' 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 Merit Medical Systems .

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.0%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at Merit Medical Systems thanks to its ability to profitably reinvest capital.

What We Can Learn From Merit Medical Systems' ROCE

All in all, it's terrific to see that Merit Medical Systems is reaping the rewards from prior investments and is growing its capital base. And a remarkable 270% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for MMSI on our platform that is definitely worth checking out.

While Merit Medical Systems 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.