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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Advanced Medical Solutions Group (LON:AMS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. The formula for this calculation on Advanced Medical Solutions Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = UK£18m ÷ (UK£231m - UK£14m) (Based on the trailing twelve months to June 2020).
Thus, Advanced Medical Solutions Group has an ROCE of 8.2%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.
View our latest analysis for Advanced Medical Solutions Group
In the above chart we have measured Advanced Medical Solutions Group'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 report on analyst forecasts for the company.
The Trend Of ROCE
On the surface, the trend of ROCE at Advanced Medical Solutions Group doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 8.2%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Advanced Medical Solutions Group's ROCE
We're a bit apprehensive about Advanced Medical Solutions Group because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 40% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.