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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Suido Kiko Kaisha's (TYO:6403) returns on capital, so let's have a look.
Understanding 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. Analysts use this formula to calculate it for Suido Kiko Kaisha:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = JP¥1.6b ÷ (JP¥19b - JP¥7.3b) (Based on the trailing twelve months to September 2020).
Thus, Suido Kiko Kaisha has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Machinery industry.
See our latest analysis for Suido Kiko Kaisha
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'd like to look at how Suido Kiko Kaisha 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 Suido Kiko Kaisha's ROCE Trend?
Suido Kiko Kaisha is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 36% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.The Bottom Line
As discussed above, Suido Kiko Kaisha appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 36% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Suido Kiko Kaisha does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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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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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About TSE:6403
Suido Kiko Kaisha
Operates as a water treatment company in the fields of sewage and industrial wastewater treatment in Japan and internationally.
Flawless balance sheet established dividend payer.
