Should You Be Worried About Kyokuto SankiLtd's (TYO:6233) Returns On Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Kyokuto SankiLtd (TYO:6233), so let's see why.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kyokuto SankiLtd:

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

0.032 = JP¥120m ÷ (JP¥7.6b - JP¥3.8b) (Based on the trailing twelve months to September 2020).

Thus, Kyokuto SankiLtd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.8%.

See our latest analysis for Kyokuto SankiLtd

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

The Trend Of ROCE

There is reason to be cautious about Kyokuto SankiLtd, given the returns are trending downwards. To be more specific, the ROCE was 10% four years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kyokuto SankiLtd to turn into a multi-bagger.

On a side note, Kyokuto SankiLtd's current liabilities are still rather high at 50% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 33% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Kyokuto SankiLtd (of which 2 shouldn't be ignored!) that you should know about.

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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