Should You Be Impressed By YKT's (TYO:2693) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at YKT (TYO:2693) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for YKT:

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

0.026 = JP¥232m ÷ (JP¥11b - JP¥2.3b) (Based on the trailing twelve months to September 2020).

Thus, YKT has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

Check out our latest analysis for YKT

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

So How Is YKT's ROCE Trending?

In terms of YKT's historical ROCE trend, it doesn't exactly demand attention. The company has employed 46% more capital in the last five years, and the returns on that capital have remained stable at 2.6%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In conclusion, YKT has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

YKT does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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