Some Investors May Be Worried About Advanced Medical Solutions Group's (LON:AMS) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Advanced Medical Solutions Group (LON:AMS) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Advanced Medical Solutions Group, this is the formula:

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

0.052 = UK£12m ÷ (UK£239m - UK£15m) (Based on the trailing twelve months to December 2020).

Therefore, Advanced Medical Solutions Group has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 6.9%.

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, you can check out the forecasts from the analysts covering Advanced Medical Solutions Group here for free.

How Are Returns Trending?

In terms of Advanced Medical Solutions Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Advanced Medical Solutions Group have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 45% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Advanced Medical Solutions Group does have some risks though, and we've spotted 1 warning sign for Advanced Medical Solutions Group that you might be interested in.

While Advanced Medical Solutions Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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