The article discusses the evaluation of SDI (ASX:SDI) as a potential multi-bagger stock based on return on capital employed (ROCE) and capital employed. An increase in both these aspects is typically a sign of a company with a good business model and profitable reinvestment opportunities. However, analysis suggests the trends of SDI do not fit the multi-bagger criteria.

ROCE is a metric used to evaluate how much pre-tax income a company earns on the capital invested in its business. The formula for calculating this for SDI is: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) รท (Total Assets - Current Liabilities). Based on the last twelve months to June 2023, SDI has an ROCE of 9.1% which is considered low, but is comparable with the 9.5% average of the Medical Equipment industry.

In the last five years, SDI’s ROCE has decreased from 12% to 9.1%. However, both the company’s revenue and assets have increased in the business, suggesting investment in growth, even though this has resulted in a short-term reduction in ROCE. If these investments are successful, they could significantly benefit long-term stock performance. Over the past five years, the stock has only grown 33%, potentially still making it an appealing investment if other fundamentals are strong.

Nevertheless, some risks associated with SDI were identified, which include three warning signs revealed in the investment analysis. This needs to be factored into any decision about investment in the company.