Investors Could Be Concerned With Sisram Medical's (HKG:1696) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Sisram Medical (HKG:1696), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.06 = US$32m ÷ (US$627m - US$103m) (Based on the trailing twelve months to June 2024).

Thus, Sisram Medical has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.5%.

View our latest analysis for Sisram Medical

Above you can see how the current ROCE for Sisram Medical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sisram Medical for free.

How Are Returns Trending?

When we looked at the ROCE trend at Sisram Medical, we didn't gain much confidence. Around five years ago the returns on capital were 7.9%, but since then they've fallen to 6.0%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Sisram Medical is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 2.2% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Like most companies, Sisram Medical 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.