Should You Be Impressed By KyowakogyosyoLtd's (TYO:5971) Returns on Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at KyowakogyosyoLtd (TYO:5971) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 KyowakogyosyoLtd, this is the formula:

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

0.012 = JP¥141m ÷ (JP¥13b - JP¥1.1b) (Based on the trailing twelve months to October 2020).

Thus, KyowakogyosyoLtd has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.7%.

View our latest analysis for KyowakogyosyoLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for KyowakogyosyoLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KyowakogyosyoLtd, check out these free graphs here.

What Can We Tell From KyowakogyosyoLtd's ROCE Trend?

In terms of KyowakogyosyoLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 2.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On KyowakogyosyoLtd's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for KyowakogyosyoLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 61% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 2 warning signs for KyowakogyosyoLtd that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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