Is This A Sign of Things To Come At Shoei YakuhinLtd (TYO:3537)?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Shoei YakuhinLtd (TYO:3537) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Shoei YakuhinLtd, this is the formula:

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

0.0098 = JP¥95m ÷ (JP¥14b - JP¥4.4b) (Based on the trailing twelve months to September 2020).

So, Shoei YakuhinLtd has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

See our latest analysis for Shoei YakuhinLtd

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Shoei YakuhinLtd. Unfortunately the returns on capital have diminished from the 3.0% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Shoei YakuhinLtd to turn into a multi-bagger.

What We Can Learn From Shoei YakuhinLtd's ROCE

In summary, it's unfortunate that Shoei YakuhinLtd is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Shoei YakuhinLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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