MEDIROM Healthcare Technologies' (NASDAQ:MRM) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at MEDIROM Healthcare Technologies (NASDAQ:MRM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 MEDIROM Healthcare Technologies:

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

0.031 = JP¥97m ÷ (JP¥6.7b - JP¥3.6b) (Based on the trailing twelve months to December 2022).

Thus, MEDIROM Healthcare Technologies has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.8%.

View our latest analysis for MEDIROM Healthcare Technologies

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

How Are Returns Trending?

In terms of MEDIROM Healthcare Technologies' historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 5.3%, but since then they've fallen to 3.1%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, MEDIROM Healthcare Technologies has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On MEDIROM Healthcare Technologies' ROCE

While returns have fallen for MEDIROM Healthcare Technologies in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 35% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

MEDIROM Healthcare Technologies does have some risks, we noticed 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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.