Returns on Capital Paint A Bright Future For C.I. MedicalLtd (TYO:3540)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of C.I. MedicalLtd (TYO:3540) we really liked what we saw.

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. Analysts use this formula to calculate it for C.I. MedicalLtd:

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

0.33 = JP¥4.7b ÷ (JP¥19b - JP¥4.7b) (Based on the trailing twelve months to December 2020).

So, C.I. MedicalLtd has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Online Retail industry average of 17%.

View our latest analysis for C.I. MedicalLtd

In the above chart we have measured C.I. MedicalLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering C.I. MedicalLtd here for free.

The Trend Of ROCE

The trends we've noticed at C.I. MedicalLtd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 33%. Basically the business is earning more per dollar of capital invested and in addition to that, 127% more capital is being employed now too. So we're very much inspired by what we're seeing at C.I. MedicalLtd thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that C.I. MedicalLtd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And given the stock has remained rather flat over the last three years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

C.I. MedicalLtd does have some risks though, and we've spotted 1 warning sign for C.I. MedicalLtd that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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