If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Geratherm Medical's (ETR:GME) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Geratherm Medical:

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

0.058 = €2.1m ÷ (€38m - €1.2m) (Based on the trailing twelve months to June 2023).

Thus, Geratherm Medical has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 7.3%.

Check out our latest analysis for Geratherm Medical

In the above chart we have measured Geratherm Medical's 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 analyst report for Geratherm Medical .

What Can We Tell From Geratherm Medical's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 5.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 59%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Geratherm Medical has decreased current liabilities to 3.1% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Geratherm Medical's ROCE

To sum it up, Geratherm Medical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 43% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.