To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Sisram Medical (HKG:1696), we don’t think it’s current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.044 = US$15m ÷ (US$388m – US$45m) (Based on the trailing twelve months to June 2020).
Thus, Sisram Medical has an ROCE of 4.4%. In absolute terms, that’s a low return and it also under-performs the Medical Equipment industry average of 10%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you’re interested in investigating Sisram Medical’s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Sisram Medical Tell Us?
In terms of Sisram Medical’s historical ROCE movements, the trend isn’t fantastic. To be more specific, ROCE has fallen from 7.6% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On Sisram Medical’s ROCE
In summary, Sisram Medical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 27% in the last year. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing to note, we’ve identified 3 warning signs with Sisram Medical and understanding these should be part of your investment process.
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. 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.
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