What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 Inspire Medical Systems (NYSE:INSP) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Inspire Medical Systems, this is the formula:

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

0.019 = US$13m ÷ (US$796m - US$74m) (Based on the trailing twelve months to September 2024).

Thus, Inspire Medical Systems has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.8%.

Above you can see how the current ROCE for Inspire Medical Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Inspire Medical Systems .

What Can We Tell From Inspire Medical Systems' ROCE Trend?

The fact that Inspire Medical Systems 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 1.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Inspire Medical Systems is utilizing 323% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

Long story short, we're delighted to see that Inspire Medical Systems' reinvestment activities have paid off and the company is now profitable. And a remarkable 162% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Inspire Medical Systems looks impressive, no company is worth an infinite price. The intrinsic value infographic for INSP helps visualize whether it is currently trading for a fair price.

While Inspire Medical Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.