What Do The Returns On Capital At Suzumo Machinery (TYO:6405) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after investigating Suzumo Machinery (TYO:6405), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.041 = JP¥523m ÷ (JP¥14b - JP¥1.1b) (Based on the trailing twelve months to September 2020).

So, Suzumo Machinery has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.7%.

See our latest analysis for Suzumo Machinery

Above you can see how the current ROCE for Suzumo Machinery compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at Suzumo Machinery, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line

In summary, Suzumo Machinery is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 65% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Suzumo Machinery, we've discovered 2 warning signs that you should be aware of.

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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