Returns On Capital Signal Tricky Times Ahead For Medical Net (TSE:3645)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Medical Net (TSE:3645), we don't think it's current trends fit the mold of a multi-bagger.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Medical Net:

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

0.078 = JP¥178m ÷ (JP¥4.4b - JP¥2.1b) (Based on the trailing twelve months to November 2024).

So, Medical Net has an ROCE of 7.8%. Ultimately, that's a low return and it under-performs the Interactive Media and Services industry average of 15%.

View our latest analysis for Medical Net

Historical performance is a great place to start when researching a stock so above you can see the gauge for Medical Net's ROCE against it's prior returns. If you're interested in investigating Medical Net's past further, check out this free graph covering Medical Net's past earnings, revenue and cash flow .

What Can We Tell From Medical Net's ROCE Trend?

When we looked at the ROCE trend at Medical Net, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.8% from 16% five 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 side note, Medical Net's current liabilities are still rather high at 47% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

While returns have fallen for Medical Net in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Medical Net does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Medical Net may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.