Stock Analysis

What Do The Returns On Capital At EKF Diagnostics Holdings (LON:EKF) Tell Us?

  •  Updated
AIM:EKF
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at EKF Diagnostics Holdings (LON:EKF) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 EKF Diagnostics Holdings:

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

0.11 = UK£9.5m ÷ (UK£104m - UK£20m) (Based on the trailing twelve months to June 2020).

Thus, EKF Diagnostics Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Medical Equipment industry.

See our latest analysis for EKF Diagnostics Holdings

roce
AIM:EKF Return on Capital Employed January 6th 2021

Above you can see how the current ROCE for EKF Diagnostics Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering EKF Diagnostics Holdings here for free.

What Can We Tell From EKF Diagnostics Holdings' ROCE Trend?

Over the past five years, EKF Diagnostics Holdings' ROCE has remained relatively flat while the business is using 23% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

What We Can Learn From EKF Diagnostics Holdings' ROCE

It's a shame to see that EKF Diagnostics Holdings is effectively shrinking in terms of its capital base. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 755% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

EKF Diagnostics Holdings does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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