There's Been No Shortage Of Growth Recently For Medical Net's (TSE:3645) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Medical Net (TSE:3645) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.13 = JP¥299m ÷ (JP¥4.0b - JP¥1.6b) (Based on the trailing twelve months to May 2024).

So, Medical Net has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 16% generated by the Interactive Media and Services industry.

Check out our latest analysis for Medical Net

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Medical Net.

How Are Returns Trending?

Investors would be pleased with what's happening at Medical Net. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 38%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Medical Net's ROCE

To sum it up, Medical Net has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 48% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know more about Medical Net, we've spotted 4 warning signs, and 1 of them is concerning.

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.