Will The ROCE Trend At Kanda Tsushinki (TYO:1992) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kanda Tsushinki's (TYO:1992) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for Kanda Tsushinki:

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

0.083 = JP¥449m ÷ (JP¥7.2b - JP¥1.8b) (Based on the trailing twelve months to September 2020).

Therefore, Kanda Tsushinki has an ROCE of 8.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for Kanda Tsushinki

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

So How Is Kanda Tsushinki's ROCE Trending?

Kanda Tsushinki is showing promise given that its ROCE is trending up and to the right. The figures show that over the last four years, ROCE has grown 109% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

As discussed above, Kanda Tsushinki appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 103% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Kanda Tsushinki you'll probably want to know about.

While Kanda Tsushinki isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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