Point-of-care specialist EKF Diagnostics(LSE: EKF) has released an upbeat trading update today with plenty of good news on revenues, earnings and investment plans. But does that mean now is the right time to buy it?
EKF's third quarter of the year was a successful one. It was materially higher than budget and at a run-rate above and beyond market forecasts. EKF now expects to record revenues and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for 2016 that will exceed even the high end of current market forecasts.
Additionally, EKF has also announced that its cash generation during the third quarter has been strong and its net debt position has therefore been boosted considerably. Although EKF is expected to continue to invest for long-term growth through to the end of the year, it now expects to be cash positive within the next year. Crucially, this won't be to the detriment of capex to increase consumables capacity in Germany and to replace equipment in the US.
The market has reacted positively to EKF's update. Its shares are up by 15% and this takes them to a rise of 52% in the last six months. Looking ahead, there could be more capital gains to come, since EKF offers stunning earnings growth forecasts at a very reasonable price.
For example, EKF is expected to turn a profit in the current year after five years of straight losses. Next year, its bottom line is forecast to rise by 134% and this puts it on a price-to-earnings growth (PEG) ratio of just 0.3. This indicates that it offers significant upward rerating potential and it would therefore be unsurprising for it to continue to beat the wider index.
Of course, there are other options within the healthcare space. A notable example is Smith & Nephew(LSE: SN). It offers a lower risk profile than EKF since it has an excellent track record of profitability. It also has a much stronger balance sheet, superior cash flow and greater diversity in terms of its product offering and geographic exposure.
Furthermore, Smith & Nephew offers an upbeat outlook. Its bottom line is expected to grow by 13% in the next financial year and this puts it on a PEG ratio of just 1.4. This shows that while Smith & Nephew is a large cap that may not be able to compete with smaller peers in terms of growth, it nevertheless offers substantial capital gain potential.
In fact, Smith & Nephew's risk/reward ratio is more appealing than that of EKF. Certainly, EKF is worth buying due to its rapid improvement, growth prospects and low valuation. However, Smith & Nephew's lower risk and still relatively high reward prospects make it the better overall investment for the long term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.