Koken Boring MachineLtd (TYO:6297) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Koken Boring MachineLtd (TYO:6297) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Koken Boring MachineLtd, this is the formula:

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

0.072 = JP¥427m ÷ (JP¥9.8b - JP¥3.9b) (Based on the trailing twelve months to December 2020).

So, Koken Boring MachineLtd has an ROCE of 7.2%. On its own, that's a low figure but it's around the 6.4% average generated by the Machinery industry.

View our latest analysis for Koken Boring MachineLtd

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 Koken Boring MachineLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Koken Boring MachineLtd Tell Us?

On the surface, the trend of ROCE at Koken Boring MachineLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.2% from 23% five years ago. However it looks like Koken Boring MachineLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Koken Boring MachineLtd's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, Koken Boring MachineLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Koken Boring MachineLtd, we've discovered 3 warning signs that you should be aware of.

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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