MEDIROM Healthcare Technologies (NASDAQ:MRM) Might Be Having Difficulty Using Its Capital Effectively
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating MEDIROM Healthcare Technologies (NASDAQ:MRM), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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).
So, 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 7.6%.
See our latest analysis for MEDIROM Healthcare Technologies
Historical performance is a great place to start when researching a stock so above you can see the gauge for MEDIROM Healthcare Technologies' ROCE against it's prior returns. If you're interested in investigating MEDIROM Healthcare Technologies' past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For MEDIROM Healthcare Technologies Tell Us?
On the surface, the trend of ROCE at MEDIROM Healthcare Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 5.3% over the last four years. 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.
Another thing to note, MEDIROM Healthcare Technologies has a high ratio of current liabilities to total assets of 54%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for MEDIROM Healthcare Technologies. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing MEDIROM Healthcare Technologies we've found 4 warning signs (3 are potentially serious!) that you should be aware of before investing here.
While MEDIROM Healthcare Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
