G-Tekt's (TSE:5970) 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? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at G-Tekt (TSE:5970) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for G-Tekt, this is the formula:

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

0.069 = JP¥16b ÷ (JP¥304b - JP¥69b) (Based on the trailing twelve months to March 2024).

Thus, G-Tekt has an ROCE of 6.9%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

View our latest analysis for G-Tekt

In the above chart we have measured G-Tekt's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for G-Tekt .

What Can We Tell From G-Tekt's ROCE Trend?

When we looked at the ROCE trend at G-Tekt, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like G-Tekt might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, G-Tekt is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

G-Tekt could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 5970 on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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