RUDEN HOLDINGSLtd (TYO:1400) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at RUDEN HOLDINGSLtd (TYO:1400) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on RUDEN HOLDINGSLtd is:

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

0.025 = JP¥70m ÷ (JP¥3.2b - JP¥361m) (Based on the trailing twelve months to December 2020).

Therefore, RUDEN HOLDINGSLtd has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See 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 want to delve into the historical earnings, revenue and cash flow of RUDEN HOLDINGSLtd, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at RUDEN HOLDINGSLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.5% from 6.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On RUDEN HOLDINGSLtd's ROCE

We're a bit apprehensive about RUDEN HOLDINGSLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 97% 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 shouldn't be ignored) .

While RUDEN HOLDINGSLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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