Here's What We Make Of KITA KOUDENSHA's (SPSE:1734) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at KITA KOUDENSHA (SPSE:1734), so let's see why.

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

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. The formula for this calculation on KITA KOUDENSHA is:

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

0.055 = JP¥385m ÷ (JP¥9.1b - JP¥2.2b) (Based on the trailing twelve months to September 2020).

Therefore, KITA KOUDENSHA has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for KITA KOUDENSHA

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 want to delve into the historical earnings, revenue and cash flow of KITA KOUDENSHA, check out these free graphs here.

What Does the ROCE Trend For KITA KOUDENSHA Tell Us?

In terms of KITA KOUDENSHA's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on KITA KOUDENSHA becoming one if things continue as they have.

The Bottom Line On KITA KOUDENSHA's ROCE

In summary, it's unfortunate that KITA KOUDENSHA is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 17% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about KITA KOUDENSHA, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

While KITA KOUDENSHA 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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