A Novel Performance Metric for Device Companies
Return on invested capital, or ROIC, is a financial measurement that may correlate more strongly with a medical device company's stock performance than other metrics, such as EBITDA. A sample of 20 publicly traded pure-play device firms showed that while most of the companies control costs and maintain healthy cash flows, few firms focus on capital efficiency to build a platform for growth. Two case studies also make the point: Stryker's 1998 acquisition of Howmedica illustrates how difficult it may be to recover capital turnover, a measurement that is affected by activities that drive top-line revenue growth and assets, after a major acquisition. On the other hand, the recent financial history of Varian Medical, shows the positive effects of focusing on capital efficiency. The conclusion: Improving the rate of capital turnover should provide an opportunity to increase shareholder value.
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