Can InfuSystem Holdings (NYSEMKT:INFU) Continue To Grow Its Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at InfuSystem Holdings (NYSEMKT:INFU) and its trend of ROCE, we really liked what we saw.

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 InfuSystem Holdings:

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

0.16 = US$9.6m ÷ (US$80m - US$20m) (Based on the trailing twelve months to September 2020).

Thus, InfuSystem Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 11% generated by the Healthcare industry.

Check out our latest analysis for InfuSystem Holdings

In the above chart we have measured InfuSystem Holdings' prior ROCE against its prior performance, but the future is arguably more important. 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 InfuSystem Holdings' ROCE Trend?

We're pretty happy with how the ROCE has been trending at InfuSystem Holdings. We found that the returns on capital employed over the last five years have risen by 66%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

In Conclusion...

In the end, InfuSystem Holdings has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 452% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if InfuSystem Holdings can keep these trends up, it could have a bright future ahead.

InfuSystem Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While InfuSystem Holdings 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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