Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in PolyNovo's (ASX:PNV) returns on capital, so let's have a look.

Our free stock report includes 1 warning sign investors should be aware of before investing in PolyNovo. Read for free now.

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 PolyNovo:

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

0.075 = AU$6.8m ÷ (AU$113m - AU$23m) (Based on the trailing twelve months to December 2024).

Thus, PolyNovo has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 13%.

View our latest analysis for PolyNovo

In the above chart we have measured PolyNovo'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 PolyNovo for free.

What Can We Tell From PolyNovo's ROCE Trend?

The fact that PolyNovo is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 7.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, PolyNovo is utilizing 235% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 20% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

Long story short, we're delighted to see that PolyNovo's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for PolyNovo that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.