Advertisement
New Zealand markets closed
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NZD/USD

    0.5982
    -0.0024 (-0.40%)
     
  • NZD/EUR

    0.5537
    -0.0006 (-0.11%)
     
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • OIL

    82.78
    +1.43 (+1.76%)
     
  • GOLD

    2,242.40
    +29.70 (+1.34%)
     
  • NASDAQ

    18,241.45
    -39.39 (-0.22%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,754.54
    -5.54 (-0.01%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • NZD/JPY

    90.4680
    -0.3120 (-0.34%)
     

The Returns On Capital At Boston Scientific (NYSE:BSX) Don't Inspire Confidence

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Boston Scientific (NYSE:BSX), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Boston Scientific:

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

0.071 = US$2.0b ÷ (US$32b - US$3.8b) (Based on the trailing twelve months to December 2022).

ADVERTISEMENT

Thus, Boston Scientific has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.9%.

View our latest analysis for Boston Scientific

roce
roce

Above you can see how the current ROCE for Boston Scientific compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Boston Scientific.

The Trend Of ROCE

We weren't thrilled with the trend because Boston Scientific's ROCE has reduced by 41% over the last five years, while the business employed 114% more capital. Usually this isn't ideal, but given Boston Scientific conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Boston Scientific might not have received a full period of earnings contribution from it.

On a side note, Boston Scientific has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Boston Scientific's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 75% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Boston Scientific does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Boston Scientific isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here