If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Quipt Home Medical (TSE:QIPT) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Quipt Home Medical:

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

0.027 = US$5.1m ÷ (US$247m - US$61m) (Based on the trailing twelve months to September 2023).

Thus, Quipt Home Medical has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

View our latest analysis for Quipt Home Medical

Above you can see how the current ROCE for Quipt Home Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Quipt Home Medical here for free.

How Are Returns Trending?

Quipt Home Medical has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 2.7% on its capital. In addition to that, Quipt Home Medical is employing 686% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Quipt Home Medical has decreased current liabilities to 24% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Quipt Home Medical's ROCE

In summary, it's great to see that Quipt Home Medical has managed to break into profitability and is continuing to reinvest in its business. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 79% return over the last five years. In light of that, we think it's worth looking further into this stock because if Quipt Home Medical can keep these trends up, it could have a bright future ahead.