What Can The Trends At Sanyu ConstructionLtd (TYO:1841) Tell Us About Their Returns?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Sanyu ConstructionLtd's (TYO:1841) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Sanyu ConstructionLtd:

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

0.036 = JP¥429m ÷ (JP¥14b - JP¥1.7b) (Based on the trailing twelve months to September 2020).

Therefore, Sanyu ConstructionLtd has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Sanyu ConstructionLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanyu ConstructionLtd's ROCE against it's prior returns. If you're interested in investigating Sanyu ConstructionLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sanyu ConstructionLtd's ROCE Trending?

While there are companies with higher returns on capital out there, we still find the trend at Sanyu ConstructionLtd promising. The figures show that over the last one year, ROCE has grown 124% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Sanyu ConstructionLtd's ROCE

To sum it up, Sanyu ConstructionLtd is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 14% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 2 warning signs for Sanyu ConstructionLtd that we think you should be aware of.

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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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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