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Will The ROCE Trend At Apollo Medical Holdings (NASDAQ:AMEH) Continue?

Simply Wall St

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If you're looking for a multi-bagger, there's a few things to keep an eye out 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. So when we looked at Apollo Medical Holdings (NASDAQ:AMEH) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for Apollo Medical Holdings:

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

0.068 = US$42m ÷ (US$724m - US$107m) (Based on the trailing twelve months to March 2020).

Thus, Apollo Medical Holdings has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.3%.

See our latest analysis for Apollo Medical Holdings

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In the above chart we have a measured Apollo Medical Holdings' prior ROCE against its prior performance, but the future is arguably more important. 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 Apollo Medical Holdings' ROCE Trend?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.8%. The amount of capital employed has increased too, by 249%. So we're very much inspired by what we're seeing at Apollo Medical Holdings thanks to its ability to profitably reinvest capital.

Our Take On Apollo Medical Holdings' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Apollo Medical Holdings has. Since the stock has returned a solid 10% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Apollo Medical Holdings can keep these trends up, it could have a bright future ahead.

Apollo Medical Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

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