What HKS' (TYO:7219) Returns On Capital Can Tell Us

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, HKS (TYO:7219) we aren't filled with optimism, but let's investigate further.

What is 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 HKS:

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

0.011 = JP¥105m ÷ (JP¥12b - JP¥2.3b) (Based on the trailing twelve months to November 2020).

Therefore, HKS has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 4.6%.

See our latest analysis for HKS

Historical performance is a great place to start when researching a stock so above you can see the gauge for HKS' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of HKS, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at HKS. Unfortunately the returns on capital have diminished from the 4.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect HKS to turn into a multi-bagger.

What We Can Learn From HKS' ROCE

In summary, it's unfortunate that HKS is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with HKS (including 1 which is potentially serious) .

While HKS 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. 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.
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