Advanced Medical Solutions Group (LON:AMS) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Advanced Medical Solutions Group (LON:AMS), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.099 = UK£23m ÷ (UK£250m - UK£17m) (Based on the trailing twelve months to December 2021).

Thus, Advanced Medical Solutions Group has an ROCE of 9.9%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Advanced Medical Solutions Group.

So How Is Advanced Medical Solutions Group's ROCE Trending?

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 15%, but since then they've fallen to 9.9%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Advanced Medical Solutions Group's ROCE

While returns have fallen for Advanced Medical Solutions Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 12% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Advanced Medical Solutions Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.