Should You Be Impressed By Koken Boring MachineLtd's (TYO:6297) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Koken Boring MachineLtd (TYO:6297), it didn't seem to tick all of these boxes.

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. 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)

0.08 = JP¥442m ÷ (JP¥9.0b - JP¥3.4b) (Based on the trailing twelve months to September 2020).

Thus, Koken Boring MachineLtd has an ROCE of 8.0%. On its own, that's a low figure but it's around the 6.7% average generated by the Machinery industry.

Check out our latest analysis for Koken Boring MachineLtd

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

The Trend Of ROCE

When we looked at the ROCE trend at Koken Boring MachineLtd, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 8.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

Our Take On Koken Boring MachineLtd's ROCE

To conclude, we've found that Koken Boring MachineLtd is reinvesting in the business, but returns have been falling. Since the stock has declined 31% over the last five years, investors may not be too optimistic on this trend improving either. 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 want to know some of the risks facing Koken Boring MachineLtd we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Koken Boring MachineLtd 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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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