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How Do Sisram Medical Ltd’s (HKG:1696) Returns Compare To Its Industry?

Today we'll evaluate Sisram Medical Ltd (HKG:1696) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Sisram Medical:

0.078 = US$27m ÷ (US$387m - US$41m) (Based on the trailing twelve months to June 2019.)

Therefore, Sisram Medical has an ROCE of 7.8%.

View our latest analysis for Sisram Medical

Does Sisram Medical Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. We can see Sisram Medical's ROCE is meaningfully below the Medical Equipment industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Sisram Medical's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

You can click on the image below to see (in greater detail) how Sisram Medical's past growth compares to other companies.

SEHK:1696 Past Revenue and Net Income, November 13th 2019
SEHK:1696 Past Revenue and Net Income, November 13th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. If Sisram Medical is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Sisram Medical's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Sisram Medical has total assets of US$387m and current liabilities of US$41m. As a result, its current liabilities are equal to approximately 11% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Sisram Medical's ROCE

That said, Sisram Medical's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Sisram Medical. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.