Returns On Capital At Kozo Keikaku Engineering (TYO:4748) Paint An Interesting Picture

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Kozo Keikaku Engineering's (TYO:4748) ROCE trend, we were pretty happy with what we saw.

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. The formula for this calculation on Kozo Keikaku Engineering is:

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

0.15 = JP¥1.5b ÷ (JP¥14b - JP¥4.2b) (Based on the trailing twelve months to September 2020).

Therefore, Kozo Keikaku Engineering has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 10% generated by the Construction industry.

View our latest analysis for Kozo Keikaku Engineering

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

What Can We Tell From Kozo Keikaku Engineering's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 106% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Kozo Keikaku Engineering has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 30% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Kozo Keikaku Engineering's ROCE

The main thing to remember is that Kozo Keikaku Engineering has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 150% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Kozo Keikaku Engineering does come with some risks, and we've found 2 warning signs that you should be aware of.

While Kozo Keikaku Engineering 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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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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