Returns On Capital At Sisram Medical (HKG:1696) Have Stalled

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Sisram Medical (HKG:1696) and its ROCE trend, we weren't exactly thrilled.

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)

0.084 = US$43m ÷ (US$605m - US$93m) (Based on the trailing twelve months to June 2023).

Therefore, Sisram Medical has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 9.9%.

See our latest analysis for Sisram Medical

In the above chart we have measured Sisram Medical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sisram Medical.

What The Trend Of ROCE Can Tell Us

In terms of Sisram Medical's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 60% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From Sisram Medical's ROCE

In summary, Sisram Medical has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 28% 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.

Sisram Medical does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Sisram Medical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.