Returns On Capital At Fuji Seiki (TYO:6400) Have Stalled

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Fuji Seiki (TYO:6400) and its ROCE trend, we weren't exactly thrilled.

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 Fuji Seiki, this is the formula:

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

0.075 = JP¥283m ÷ (JP¥7.4b - JP¥3.7b) (Based on the trailing twelve months to December 2020).

Therefore, Fuji Seiki has an ROCE of 7.5%. 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 Fuji Seiki

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 Fuji Seiki's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Fuji Seiki Tell Us?

In terms of Fuji Seiki's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.5% for the last five years, and the capital employed within the business has risen 45% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Another thing to note, Fuji Seiki has a high ratio of current liabilities to total assets of 49%. 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.

Our Take On Fuji Seiki's ROCE

Long story short, while Fuji Seiki has been reinvesting its capital, the returns that it's generating haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 595% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Fuji Seiki does have some risks though, and we've spotted 4 warning signs for Fuji Seiki that you might be interested in.

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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