Returns On Capital At MEDIROM Healthcare Technologies (NASDAQ:MRM) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at MEDIROM Healthcare Technologies (NASDAQ:MRM), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for MEDIROM Healthcare Technologies, this is the formula:

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

0.0012 = JP¥4.8m ÷ (JP¥8.1b - JP¥4.2b) (Based on the trailing twelve months to December 2024).

Therefore, MEDIROM Healthcare Technologies has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 10%.

View our latest analysis for MEDIROM Healthcare Technologies

Above you can see how the current ROCE for MEDIROM Healthcare Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MEDIROM Healthcare Technologies .

What Can We Tell From MEDIROM Healthcare Technologies' ROCE Trend?

We weren't thrilled with the trend because MEDIROM Healthcare Technologies' ROCE has reduced by 96% over the last five years, while the business employed 57% more capital. That being said, MEDIROM Healthcare Technologies raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with MEDIROM Healthcare Technologies' earnings and if they change as a result from the capital raise.

Another thing to note, MEDIROM Healthcare Technologies has a high ratio of current liabilities to total assets of 52%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On MEDIROM Healthcare Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that MEDIROM Healthcare Technologies is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 65% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 5 warning signs we've spotted with MEDIROM Healthcare Technologies (including 4 which make us uncomfortable) .

While MEDIROM Healthcare Technologies isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.