There Are Reasons To Feel Uneasy About JMDC's (TSE:4483) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 JMDC (TSE:4483), it didn't seem to tick all of these boxes.

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. The formula for this calculation on JMDC is:

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

0.083 = JP¥7.5b ÷ (JP¥104b - JP¥13b) (Based on the trailing twelve months to December 2023).

So, JMDC has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Healthcare Services industry average of 19%.

View our latest analysis for JMDC

In the above chart we have measured JMDC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for JMDC .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at JMDC, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, JMDC has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On JMDC's ROCE

While returns have fallen for JMDC in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 36% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to continue researching JMDC, you might be interested to know about the 2 warning signs that our analysis has discovered.

While JMDC 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.