What Can The Trends At Kitagawa SeikiLtd (TYO:6327) Tell Us About Their Returns?

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Kitagawa SeikiLtd's (TYO:6327) returns on capital, so let's have a look.

What is 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 Kitagawa SeikiLtd, this is the formula:

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

0.15 = JP¥420m ÷ (JP¥6.5b - JP¥3.7b) (Based on the trailing twelve months to September 2020).

Thus, Kitagawa SeikiLtd has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.7% it's much better.

See our latest analysis for Kitagawa SeikiLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kitagawa SeikiLtd's ROCE against it's prior returns. If you'd like to look at how Kitagawa SeikiLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kitagawa SeikiLtd's ROCE Trend?

We like the trends that we're seeing from Kitagawa SeikiLtd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 45%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 56%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kitagawa SeikiLtd has. And with a respectable 94% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Kitagawa SeikiLtd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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