Is MedikitLtd (TYO:7749) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at MedikitLtd (TYO:7749), it didn't seem to tick all of these boxes.

What is 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. To calculate this metric for MedikitLtd, this is the formula:

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

0.084 = JP¥3.8b ÷ (JP¥49b - JP¥4.0b) (Based on the trailing twelve months to December 2020).

So, MedikitLtd has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Medical Equipment industry average of 9.1%.

Check out our latest analysis for MedikitLtd

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

How Are Returns Trending?

The returns on capital haven't changed much for MedikitLtd in recent years. The company has employed 25% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, MedikitLtd has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 95% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in MedikitLtd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While MedikitLtd 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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