Be Wary Of AK Medical Holdings (HKG:1789) And Its 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at AK Medical Holdings (HKG:1789), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AK Medical Holdings is:

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

0.047 = CN¥99m ÷ (CN¥2.6b - CN¥489m) (Based on the trailing twelve months to December 2021).

Thus, AK Medical Holdings has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 10%.

Check out our latest analysis for AK Medical Holdings

In the above chart we have measured AK Medical Holdings' 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 AK Medical Holdings here for free.

The Trend Of ROCE

In terms of AK Medical Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On AK Medical Holdings' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for AK Medical Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 50% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for AK Medical Holdings you'll probably want to know about.

While AK Medical Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.