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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Advanced Medical Solutions Group (LON:AMS) and its ROCE trend, we weren't exactly thrilled.
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 Advanced Medical Solutions Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = UK£25m ÷ (UK£281m - UK£23m) (Based on the trailing twelve months to December 2022).
So, Advanced Medical Solutions Group has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 8.4%.
See our latest analysis for Advanced Medical Solutions Group
Above you can see how the current ROCE for Advanced Medical Solutions Group 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.
So How Is Advanced Medical Solutions Group's ROCE Trending?
On the surface, the trend of ROCE at Advanced Medical Solutions Group doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Advanced Medical Solutions Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Advanced Medical Solutions Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 21% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.