Here's What's Concerning About Kusurinomadoguchi's (TSE:5592) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Kusurinomadoguchi (TSE:5592), we don't think it's current trends fit the mold of a multi-bagger.

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 Kusurinomadoguchi is:

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

0.19 = JP¥1.5b ÷ (JP¥19b - JP¥11b) (Based on the trailing twelve months to September 2024).

Therefore, Kusurinomadoguchi has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 17% generated by the Healthcare Services industry.

See our latest analysis for Kusurinomadoguchi

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

What Does the ROCE Trend For Kusurinomadoguchi Tell Us?

In terms of Kusurinomadoguchi's historical ROCE movements, the trend isn't fantastic. Over the last two years, returns on capital have decreased to 19% from 28% two years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Kusurinomadoguchi has decreased its current liabilities to 59% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

In Conclusion...

While returns have fallen for Kusurinomadoguchi in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 31% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 1 warning sign with Kusurinomadoguchi and understanding it should be part of your investment process.

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. 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.