In This Article:
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.