Some Investors May Be Worried About Sanyu ConstructionLtd's (TSE:1841) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Sanyu ConstructionLtd (TSE:1841), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Sanyu ConstructionLtd:

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

0.043 = JP¥525m ÷ (JP¥15b - JP¥2.5b) (Based on the trailing twelve months to March 2024).

So, Sanyu ConstructionLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.9%.

View our latest analysis for Sanyu ConstructionLtd

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

What Can We Tell From Sanyu ConstructionLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Sanyu ConstructionLtd. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sanyu ConstructionLtd becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 13% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Sanyu ConstructionLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Sanyu ConstructionLtd 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. 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.

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