What Do The Returns On Capital At Micron Machinery (TYO:6159) Tell Us?

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Micron Machinery (TYO:6159) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Micron Machinery, this is the formula:

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

0.05 = JP¥583m ÷ (JP¥13b - JP¥1.1b) (Based on the trailing twelve months to August 2020).

Thus, Micron Machinery has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.7%.

View our latest analysis for Micron Machinery

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

How Are Returns Trending?

When we looked at the ROCE trend at Micron Machinery, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.0% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

In summary, we're somewhat concerned by Micron Machinery's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 12% 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.

If you want to know some of the risks facing Micron Machinery we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Micron Machinery 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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