Is This A Sign of Things To Come At Mikikogyo (TYO:1718)?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Mikikogyo (TYO:1718), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Mikikogyo, this is the formula:

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

0.063 = JP¥1.3b ÷ (JP¥28b - JP¥7.7b) (Based on the trailing twelve months to September 2020).

So, Mikikogyo has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

Check out our latest analysis for Mikikogyo

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 Mikikogyo's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Mikikogyo. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mikikogyo becoming one if things continue as they have.

Our Take On Mikikogyo's ROCE

In summary, it's unfortunate that Mikikogyo is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 35% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Mikikogyo does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

While Mikikogyo 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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