Are Investors Concerned With What's Going On At Terasaki ElectricLtd (TYO:6637)?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Terasaki ElectricLtd (TYO:6637) we aren't filled with optimism, but let's investigate further.

What is 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. Analysts use this formula to calculate it for Terasaki ElectricLtd:

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

0.069 = JP¥2.4b ÷ (JP¥46b - JP¥11b) (Based on the trailing twelve months to September 2020).

Thus, Terasaki ElectricLtd has an ROCE of 6.9%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

See our latest analysis for Terasaki ElectricLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Terasaki ElectricLtd's ROCE against it's prior returns. If you're interested in investigating Terasaki ElectricLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Terasaki ElectricLtd Tell Us?

There is reason to be cautious about Terasaki ElectricLtd, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Terasaki ElectricLtd to turn into a multi-bagger.

The Bottom Line On Terasaki ElectricLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 74% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Terasaki ElectricLtd that you might find interesting.

While Terasaki 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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