What Do The Returns On Capital At Hamai Industries (TYO:6497) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Hamai Industries (TYO:6497), 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. The formula for this calculation on Hamai Industries is:

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

0.037 = JP¥541m ÷ (JP¥17b - JP¥2.1b) (Based on the trailing twelve months to September 2020).

So, Hamai Industries has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.8%.

See our latest analysis for Hamai Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hamai Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hamai Industries, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Hamai Industries, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Hamai Industries doesn't end up being a multi-bagger in a few years time.

Our Take On Hamai Industries' ROCE

In summary, Hamai Industries isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hamai Industries (of which 1 can't be ignored!) that you should know about.

While Hamai Industries 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.

If you’re looking to trade Hamai Industries, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.