Super Tool (TYO:5990) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Super Tool (TYO:5990), so let's see why.

What is 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. To calculate this metric for Super Tool, this is the formula:

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

0.053 = JP¥578m ÷ (JP¥13b - JP¥2.5b) (Based on the trailing twelve months to December 2020).

Therefore, Super Tool has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.3% average generated by the Machinery industry.

Check out our latest analysis for Super Tool

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

So How Is Super Tool's ROCE Trending?

There is reason to be cautious about Super Tool, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Super Tool becoming one if things continue as they have.

The Bottom Line On Super Tool's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 40% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Super Tool does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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