Returns On Capital At RUDEN HOLDINGSLtd (TYO:1400) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think RUDEN HOLDINGSLtd (TYO:1400) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 RUDEN HOLDINGSLtd, this is the formula:

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

0.0059 = JP¥17m ÷ (JP¥3.2b - JP¥323m) (Based on the trailing twelve months to September 2020).

So, RUDEN HOLDINGSLtd has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

Check out our latest analysis for RUDEN HOLDINGSLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating RUDEN HOLDINGSLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For RUDEN HOLDINGSLtd Tell Us?

On the surface, the trend of ROCE at RUDEN HOLDINGSLtd doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 0.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

In summary, we're somewhat concerned by RUDEN HOLDINGSLtd's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 55% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with RUDEN HOLDINGSLtd (including 1 which is is significant) .

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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