Returns On Capital At Koatsu KogyoLtd (TSE:1743) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Koatsu KogyoLtd (TSE:1743) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Koatsu KogyoLtd is:

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

0.05 = JP¥456m ÷ (JP¥14b - JP¥5.1b) (Based on the trailing twelve months to June 2024).

So, Koatsu KogyoLtd has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.8%.

Check out our latest analysis for Koatsu KogyoLtd

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'd like to look at how Koatsu KogyoLtd has performed in the past in other metrics, you can view this free graph of Koatsu KogyoLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

Things have been pretty stable at Koatsu KogyoLtd, 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Koatsu KogyoLtd to be a multi-bagger going forward.

In Conclusion...

We can conclude that in regards to Koatsu KogyoLtd's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 11% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you'd like to know more about Koatsu KogyoLtd, we've spotted 3 warning signs, and 1 of them is significant.

While Koatsu KogyoLtd 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.