Stock Analysis

Investors Will Want EKF Diagnostics Holdings' (LON:EKF) Growth In ROCE To Persist

  •  Updated
AIM:EKF
Source: Shutterstock

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, EKF Diagnostics Holdings (LON:EKF) looks quite promising in regards to its trends of return on capital.

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 EKF Diagnostics Holdings:

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

0.19 = UK£16m ÷ (UK£101m - UK£19m) (Based on the trailing twelve months to December 2020).

So, EKF Diagnostics Holdings has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Medical Equipment industry.

Check out our latest analysis for EKF Diagnostics Holdings

roce
AIM:EKF Return on Capital Employed May 11th 2021

In the above chart we have measured EKF Diagnostics Holdings' 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

The fact that EKF Diagnostics Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 19% on its capital. And unsurprisingly, like most companies trying to break into the black, EKF Diagnostics Holdings is utilizing 58% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

Long story short, we're delighted to see that EKF Diagnostics Holdings' reinvestment activities have paid off and the company is now profitable. And a remarkable 689% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

EKF Diagnostics Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

If you’re looking to trade EKF Diagnostics Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether EKF Diagnostics Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis