There Are Reasons To Feel Uneasy About Kumagai GumiLtd's (TSE:1861) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kumagai GumiLtd (TSE:1861) and its ROCE trend, we weren't exactly thrilled.

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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. Analysts use this formula to calculate it for Kumagai GumiLtd:

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

0.07 = JP¥16b ÷ (JP¥443b - JP¥215b) (Based on the trailing twelve months to June 2025).

So, Kumagai GumiLtd has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.8%.

See our latest analysis for Kumagai GumiLtd

Above you can see how the current ROCE for Kumagai GumiLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kumagai GumiLtd for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Kumagai GumiLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.0% from 15% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Kumagai GumiLtd's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Kumagai GumiLtd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kumagai GumiLtd. And long term investors must be optimistic going forward because the stock has returned a huge 159% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

While Kumagai GumiLtd 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.