To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Inari Medical (NASDAQ:NARI) and its trend of ROCE, we really liked what we saw.
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. The formula for this calculation on Inari Medical is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$23m ÷ (US$235m - US$21m) (Based on the trailing twelve months to March 2021).
Thus, Inari Medical has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Medical Equipment industry.NasdaqGS:NARI Return on Capital Employed May 27th 2021
Above you can see how the current ROCE for Inari Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Inari Medical's ROCE Trend?
The fact that Inari Medical is now generating some pre-tax profits from its prior investments is very encouraging. About two years ago the company was generating losses but things have turned around because it's now earning 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Inari Medical is utilizing 678% more capital than it was two years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On Inari Medical's ROCE
In summary, it's great to see that Inari Medical has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 104% total return over the last year 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.
One final note, you should learn about the 4 warning signs we've spotted with Inari Medical (including 1 which shouldn't be ignored) .
While Inari Medical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StoryNARI
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