We're Watching These Trends At Hoshi Iryo-Sanki (TYO:7634)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at Hoshi Iryo-Sanki (TYO:7634) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. The formula for this calculation on Hoshi Iryo-Sanki is:

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

0.065 = JP¥969m ÷ (JP¥18b - JP¥3.1b) (Based on the trailing twelve months to September 2020).

So, Hoshi Iryo-Sanki has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.8%.

View our latest analysis for Hoshi Iryo-Sanki

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hoshi Iryo-Sanki's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hoshi Iryo-Sanki, check out these free graphs here.

So How Is Hoshi Iryo-Sanki's ROCE Trending?

In terms of Hoshi Iryo-Sanki's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.5% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

In summary, Hoshi Iryo-Sanki 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 37% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Hoshi Iryo-Sanki and understanding this should be part of your investment process.

While Hoshi Iryo-Sanki 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. 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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