Stock Analysis

Returns At KyowakogyosyoLtd (TYO:5971) Are On The Way Up

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TSE:5971
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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. So on that note, KyowakogyosyoLtd (TYO:5971) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on KyowakogyosyoLtd is:

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

0.023 = JP¥283m ÷ (JP¥14b - JP¥1.2b) (Based on the trailing twelve months to January 2021).

Therefore, KyowakogyosyoLtd has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.3%.

See our latest analysis for KyowakogyosyoLtd

roce
JASDAQ:5971 Return on Capital Employed April 16th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how KyowakogyosyoLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 32%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

All in all, it's terrific to see that KyowakogyosyoLtd is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 78% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

KyowakogyosyoLtd does have some risks though, and we've spotted 1 warning sign for KyowakogyosyoLtd that you might be interested in.

While KyowakogyosyoLtd 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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About TSE:5971

KyowakogyosyoLtd

Kyowakogyosyo Co.,Ltd. manufactures and sells hexagon bolts, JIS hexagon socket head cap screws, bolts for construction machinery and internal combustion engines, cold-forged parts for automobiles, and special cold-/hot-forged parts in Japan and internationally.

Excellent balance sheet, good value and pays a dividend.

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