The Returns At Kyoritsu Air Tech (TYO:5997) Provide Us With Signs Of What's To Come

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kyoritsu Air Tech (TYO:5997) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Kyoritsu Air Tech, this is the formula:

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

0.079 = JP¥611m ÷ (JP¥12b - JP¥4.5b) (Based on the trailing twelve months to December 2020).

So, Kyoritsu Air Tech has an ROCE of 7.9%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.

See our latest analysis for Kyoritsu Air Tech

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

What Can We Tell From Kyoritsu Air Tech's ROCE Trend?

When we looked at the ROCE trend at Kyoritsu Air Tech, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 7.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Kyoritsu Air Tech have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 32% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 2 warning signs facing Kyoritsu Air Tech that you might find interesting.

While Kyoritsu Air Tech 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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