Is AK Medical Holdings (HKG:1789) Likely To Turn Things Around?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think AK Medical Holdings (HKG:1789) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. The formula for this calculation on AK Medical Holdings is:

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

0.18 = CN¥358m ÷ (CN¥2.4b - CN¥463m) (Based on the trailing twelve months to June 2020).

So, AK Medical Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 10% it's much better.

View our latest analysis for AK Medical Holdings

Above you can see how the current ROCE for AK Medical Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From AK Medical Holdings' ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 38% five years ago, while capital employed has grown 1,047%. Usually this isn't ideal, but given AK Medical Holdings conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. AK Medical Holdings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, AK Medical Holdings has decreased its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On AK Medical Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that AK Medical Holdings is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 47% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to know some of the risks facing AK Medical Holdings we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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. 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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