To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, AsiaMedic (Catalist:505) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AsiaMedic, this is the formula:

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

0.022 = S$314k ÷ (S$19m - S$4.9m) (Based on the trailing twelve months to June 2022).

Thus, AsiaMedic has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 13%.

View our latest analysis for AsiaMedic

Historical performance is a great place to start when researching a stock so above you can see the gauge for AsiaMedic's ROCE against it's prior returns. If you're interested in investigating AsiaMedic's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is AsiaMedic's ROCE Trending?

Shareholders will be relieved that AsiaMedic has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On AsiaMedic's ROCE

To sum it up, AsiaMedic is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 83% in the last five years so there could be other areas of the business hurting its prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know about the risks facing AsiaMedic, we've discovered 2 warning signs that you should be aware of.

While AsiaMedic isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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