The Trends At LONG LIFE HOLDING (TYO:4355) That You Should Know About

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at LONG LIFE HOLDING (TYO:4355), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for LONG LIFE HOLDING:

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

0.0092 = JP¥99m ÷ (JP¥20b - JP¥8.9b) (Based on the trailing twelve months to October 2020).

Therefore, LONG LIFE HOLDING has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

See our latest analysis for LONG LIFE HOLDING

Historical performance is a great place to start when researching a stock so above you can see the gauge for LONG LIFE HOLDING's ROCE against it's prior returns. If you'd like to look at how LONG LIFE HOLDING has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For LONG LIFE HOLDING Tell Us?

On the surface, the trend of ROCE at LONG LIFE HOLDING doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.9% from 11% five years ago. However it looks like LONG LIFE HOLDING might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, LONG LIFE HOLDING's current liabilities are still rather high at 45% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, LONG LIFE HOLDING is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 1.9% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for LONG LIFE HOLDING (of which 2 are a bit concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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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