Yahoo Finance Why We’re Not Keen On Sisram Medical Ltd’s (HKG:1696) 6.8% Return On Capital
Today we'll look at Sisram Medical Ltd (HKG:1696) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Sisram Medical:
0.068 = US$24m ÷ (US$393m - US$40m) (Based on the trailing twelve months to December 2019.)
So, Sisram Medical has an ROCE of 6.8%.
Check out our latest analysis for Sisram Medical
Does Sisram Medical Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Sisram Medical's ROCE is meaningfully below the Medical Equipment industry average of 11%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, 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.
Sisram Medical's current ROCE of 6.8% is lower than 3 years ago, when the company reported a 9.3% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Sisram Medical's past growth compares to other companies.
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.
Do Sisram Medical's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Sisram Medical has current liabilities of US$40m and total assets of US$393m. As a result, its current liabilities are equal to approximately 10% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Sisram Medical's ROCE
If Sisram Medical continues to earn an uninspiring ROCE, there may be better places to invest. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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. Thank you for reading.
