Be Wary Of Sisram Medical (HKG:1696) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sisram Medical (HKG:1696) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sisram Medical:

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

0.046 = US$17m ÷ (US$432m - US$55m) (Based on the trailing twelve months to December 2020).

Therefore, Sisram Medical has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 9.2%.

View our latest analysis for Sisram Medical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sisram Medical's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sisram Medical, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Sisram Medical doesn't inspire confidence. Around five years ago the returns on capital were 8.2%, but since then they've fallen to 4.6%. However it looks like Sisram Medical 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.

Our Take On Sisram Medical's ROCE

Bringing it all together, while we're somewhat encouraged by Sisram Medical's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 279% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

While Sisram Medical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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