Yahoo Finance Returns On Capital Are Showing Encouraging Signs At Zimmer Biomet Holdings (NYSE:ZBH)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Zimmer Biomet Holdings (NYSE:ZBH) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Zimmer Biomet Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$1.6b ÷ (US$22b - US$3.6b) (Based on the trailing twelve months to June 2024).
Thus, Zimmer Biomet Holdings has an ROCE of 8.7%. Even though it's in line with the industry average of 9.1%, it's still a low return by itself.
Check out our latest analysis for Zimmer Biomet Holdings
Above you can see how the current ROCE for Zimmer Biomet Holdings 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 Zimmer Biomet Holdings for free.
So How Is Zimmer Biomet Holdings' ROCE Trending?
Zimmer Biomet Holdings' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 31% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line
To sum it up, Zimmer Biomet Holdings is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 17% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for Zimmer Biomet Holdings that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.
