How Well Is Medical Ikkou GroupLtd (TYO:3353) Allocating Its Capital?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Medical Ikkou GroupLtd (TYO:3353), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Medical Ikkou GroupLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.054 = JP¥1.0b ÷ (JP¥27b - JP¥8.0b) (Based on the trailing twelve months to November 2020).

So, Medical Ikkou GroupLtd has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.7%.

See our latest analysis for Medical Ikkou GroupLtd

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 Medical Ikkou GroupLtd's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Medical Ikkou GroupLtd. About five years ago, returns on capital were 8.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Medical Ikkou GroupLtd to turn into a multi-bagger.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Medical Ikkou GroupLtd (at least 2 which can't be ignored) , and understanding them would certainly be useful.

While Medical Ikkou GroupLtd 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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