Yahoo Finance Insulet's (NASDAQ:PODD) Returns On Capital Are Heading Higher
What are the early trends we should look for to identify a stock that could 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Insulet's (NASDAQ:PODD) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Insulet:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$63m ÷ (US$2.3b - US$365m) (Based on the trailing twelve months to December 2022).
So, Insulet has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10.0%.
Check out our latest analysis for Insulet
Above you can see how the current ROCE for Insulet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Insulet here for free.
The Trend Of ROCE
The fact that Insulet is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.3% on its capital. Not only that, but the company is utilizing 158% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line
Long story short, we're delighted to see that Insulet's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 265% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
One more thing: We've identified 3 warning signs with Insulet (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
While Insulet 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.
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