Returns On Capital At APM Human Services International (ASX:APM) Have Stalled

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think APM Human Services International (ASX:APM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for APM Human Services International, this is the formula:

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

0.052 = AU$121m ÷ (AU$2.7b - AU$364m) (Based on the trailing twelve months to June 2022).

So, APM Human Services International has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 13%.

View our latest analysis for APM Human Services International

In the above chart we have measured APM Human Services International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering APM Human Services International here for free.

So How Is APM Human Services International's ROCE Trending?

There are better returns on capital out there than what we're seeing at APM Human Services International. Over the past three years, ROCE has remained relatively flat at around 5.2% and the business has deployed 255% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, APM Human Services International has done well to reduce current liabilities to 14% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On APM Human Services International's ROCE

In conclusion, APM Human Services International has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 14% in the last year. Therefore based on the analysis done in this article, we don't think APM Human Services International has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with APM Human Services International and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.