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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Apollo Medical Holdings (NASDAQ:AMEH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for Apollo Medical Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.096 = US$66m ÷ (US$814m - US$131m) (Based on the trailing twelve months to September 2020).
So, Apollo Medical Holdings has an ROCE of 9.6%. Even though it's in line with the industry average of 10%, it's still a low return by itself.
Above you can see how the current ROCE for Apollo Medical Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Apollo Medical Holdings.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at Apollo Medical Holdings. Over the past five years, ROCE has remained relatively flat at around 9.6% and the business has deployed 165% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Apollo Medical Holdings' ROCE
In summary, Apollo Medical Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last three years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you want to continue researching Apollo Medical Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.
While Apollo Medical Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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