What Do The Returns On Capital At Yoshitake (TYO:6488) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Yoshitake (TYO:6488) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Yoshitake, this is the formula:

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

0.041 = JP¥507m ÷ (JP¥13b - JP¥934m) (Based on the trailing twelve months to September 2020).

Thus, Yoshitake 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%.

View our latest analysis for Yoshitake

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

What Can We Tell From Yoshitake's ROCE Trend?

There hasn't been much to report for Yoshitake's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Yoshitake in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Yoshitake's ROCE

In a nutshell, Yoshitake has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 57% 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.

On a separate note, we've found 2 warning signs for Yoshitake you'll probably want to know about.

While Yoshitake may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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