Be Wary Of Myotoku (TYO:6265) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Myotoku (TYO:6265) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Myotoku:

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

0.068 = JP¥333m ÷ (JP¥5.2b - JP¥310m) (Based on the trailing twelve months to December 2020).

Therefore, Myotoku has an ROCE of 6.8%. On its own, that's a low figure but it's around the 6.3% average generated by the Machinery industry.

View our latest analysis for Myotoku

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Myotoku's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Myotoku Tell Us?

When we looked at the ROCE trend at Myotoku, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.8% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Myotoku is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Myotoku (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Myotoku 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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