Yahoo Finance Investors Will Want ShockWave Medical's (NASDAQ:SWAV) Growth In ROCE To Persist
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at ShockWave Medical (NASDAQ:SWAV) and its trend of ROCE, we really liked what we saw.
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 ShockWave Medical:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = US$32m ÷ (US$373m - US$51m) (Based on the trailing twelve months to March 2022).
Thus, ShockWave Medical has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.9%.
Check out our latest analysis for ShockWave Medical
In the above chart we have measured ShockWave Medical'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 report for ShockWave Medical.
What The Trend Of ROCE Can Tell Us
The fact that ShockWave Medical is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 9.9% which is a sight for sore eyes. Not only that, but the company is utilizing 517% 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.
What We Can Learn From ShockWave Medical's ROCE
To the delight of most shareholders, ShockWave Medical has now broken into profitability. Since the stock has returned a staggering 158% to shareholders over the last three years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
ShockWave Medical does have some risks though, and we've spotted 3 warning signs for ShockWave Medical that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
