What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Utah Medical Products (NASDAQ:UTMD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Utah Medical Products:

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

0.14 = US$17m ÷ (US$130m - US$3.4m) (Based on the trailing twelve months to September 2024).

Thus, Utah Medical Products has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.6% generated by the Medical Equipment industry.

Check out our latest analysis for Utah Medical Products

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Utah Medical Products' past further, check out this free graph covering Utah Medical Products' past earnings, revenue and cash flow.

What Does the ROCE Trend For Utah Medical Products Tell Us?

On the surface, the trend of ROCE at Utah Medical Products doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 14%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Utah Medical Products' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Utah Medical Products have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Utah Medical Products could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for UTMD on our platform quite valuable.

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.