Here's What's Concerning About Sanso ElectricLtd's (TYO:6518) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Sanso ElectricLtd (TYO:6518), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Sanso ElectricLtd, this is the formula:

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

0.024 = JP¥278m ÷ (JP¥15b - JP¥4.0b) (Based on the trailing twelve months to December 2020).

Thus, Sanso ElectricLtd has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.4%.

View our latest analysis for Sanso ElectricLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sanso ElectricLtd's ROCE against it's prior returns. If you'd like to look at how Sanso ElectricLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Sanso ElectricLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.5%, but since then they've fallen to 2.4%. 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.

What We Can Learn From Sanso ElectricLtd's ROCE

To conclude, we've found that Sanso ElectricLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 80% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 3 warning signs for Sanso ElectricLtd (1 is significant) you should be aware of.

While Sanso ElectricLtd 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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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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