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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Advanced Medical Solutions Group (LON:AMS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. Analysts use this formula to calculate it for Advanced Medical Solutions Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = UK£12m ÷ (UK£239m - UK£15m) (Based on the trailing twelve months to December 2020).
Thus, Advanced Medical Solutions Group has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 6.9%.
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.
What Does the ROCE Trend For Advanced Medical Solutions Group Tell Us?
On the surface, the trend of ROCE at Advanced Medical Solutions Group doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On 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. However the stock has delivered a 50% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to continue researching Advanced Medical Solutions Group, you might be interested to know about the 1 warning sign that our analysis has discovered.