MEDIROM Healthcare Technologies (NASDAQ:MRM) Will Be Hoping To Turn Its Returns On Capital Around
What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 briefly looking over the numbers, we don't think MEDIROM Healthcare Technologies (NASDAQ:MRM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for MEDIROM Healthcare Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = JP¥97m ÷ (JP¥6.7b - JP¥3.6b) (Based on the trailing twelve months to December 2022).
Thus, MEDIROM Healthcare Technologies has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 6.8%.
Check out our latest analysis for MEDIROM Healthcare Technologies
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 MEDIROM Healthcare Technologies' past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at MEDIROM Healthcare Technologies doesn't inspire confidence. Around four years ago the returns on capital were 5.3%, but since then they've fallen to 3.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, MEDIROM Healthcare Technologies' current liabilities are still rather high at 54% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From MEDIROM Healthcare Technologies' ROCE
While returns have fallen for MEDIROM Healthcare Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a final note, we found 4 warning signs for MEDIROM Healthcare Technologies (3 don't sit too well with us) you should be aware of.
While MEDIROM Healthcare Technologies may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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