Instituto de Diagnóstico (SNSE:INDISA) Will Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Instituto de Diagnóstico (SNSE:INDISA), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Instituto de Diagnóstico, this is the formula:

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

0.044 = CL$5.4b ÷ (CL$183b - CL$59b) (Based on the trailing twelve months to December 2020).

Therefore, Instituto de Diagnóstico has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 12%.

See our latest analysis for Instituto de Diagnóstico

Historical performance is a great place to start when researching a stock so above you can see the gauge for Instituto de Diagnóstico's ROCE against it's prior returns. If you'd like to look at how Instituto de Diagnóstico has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Instituto de Diagnóstico's ROCE Trending?

On the surface, the trend of ROCE at Instituto de Diagnóstico doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Instituto de Diagnóstico might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Instituto de Diagnóstico's ROCE

To conclude, we've found that Instituto de Diagnóstico is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 4.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 4 warning signs with Instituto de Diagnóstico (at least 2 which make us uncomfortable) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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