Suzumo Machinery's (TYO:6405) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at Suzumo Machinery (TYO:6405), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 Suzumo Machinery:

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

0.053 = JP¥687m ÷ (JP¥14b - JP¥1.1b) (Based on the trailing twelve months to December 2020).

Therefore, Suzumo Machinery has an ROCE of 5.3%. On its own, that's a low figure but it's around the 6.3% average generated by the Machinery industry.

View our latest analysis for Suzumo Machinery

In the above chart we have measured Suzumo Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Suzumo Machinery's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.3% from 14% five years ago. However it looks like Suzumo Machinery 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Suzumo Machinery's ROCE

Bringing it all together, while we're somewhat encouraged by Suzumo Machinery's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 77% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Suzumo Machinery could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Suzumo Machinery isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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