If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at DENTSPLY SIRONA (NASDAQ:XRAY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for DENTSPLY SIRONA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$290m ÷ (US$7.2b - US$1.2b) (Based on the trailing twelve months to September 2023).
So, DENTSPLY SIRONA has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.3%.
In the above chart we have measured DENTSPLY SIRONA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering DENTSPLY SIRONA here for free.
We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 22% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
Overall, we're not ecstatic to see DENTSPLY SIRONA reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 13% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
DENTSPLY SIRONA does have some risks though, and we've spotted 1 warning sign for DENTSPLY SIRONA that you might be interested in.
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.