Should You Be Impressed By KimuraLtd's (TYO:7461) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at KimuraLtd's (TYO:7461) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 KimuraLtd, this is the formula:

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

0.10 = JP¥1.9b ÷ (JP¥25b - JP¥6.8b) (Based on the trailing twelve months to September 2020).

So, KimuraLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Trade Distributors industry.

See our latest analysis for KimuraLtd

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

So How Is KimuraLtd's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 41% more capital in the last five years, and the returns on that capital have remained stable at 10%. 10% is a pretty standard return, and it provides some comfort knowing that KimuraLtd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On KimuraLtd's ROCE

To sum it up, KimuraLtd has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 34% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to continue researching KimuraLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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