Returns On Capital Tell Us A Lot About Medical Ikkou GroupLtd (TYO:3353)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Medical Ikkou GroupLtd (TYO:3353), so let's see why.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Medical Ikkou GroupLtd is:

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

0.054 = JP¥977m ÷ (JP¥26b - JP¥7.8b) (Based on the trailing twelve months to August 2020).

Thus, 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%.

View 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

There is reason to be cautious about Medical Ikkou GroupLtd, given the returns are trending downwards. About five years ago, returns on capital were 8.0%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Medical Ikkou GroupLtd becoming one if things continue as they have.

The Bottom Line On Medical Ikkou GroupLtd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 39% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Medical Ikkou GroupLtd (of which 2 are potentially serious!) that you should know about.

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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