Returns On Capital At Surgical Innovations Group (LON:SUN) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Surgical Innovations Group (LON:SUN) we aren't filled with optimism, but let's investigate further.

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 Surgical Innovations Group, this is the formula:

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

0.0058 = UK£73k ÷ (UK£16m - UK£2.9m) (Based on the trailing twelve months to December 2022).

Therefore, Surgical Innovations Group has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 8.6%.

See our latest analysis for Surgical Innovations Group

In the above chart we have measured Surgical Innovations Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Surgical Innovations Group here for free.

So How Is Surgical Innovations Group's ROCE Trending?

The trend of ROCE at Surgical Innovations Group is showing some signs of weakness. To be more specific, today's ROCE was 3.9% five years ago but has since fallen to 0.6%. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Surgical Innovations Group's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 50% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Surgical Innovations Group does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.