Investors Will Want Shoei YakuhinLtd's (TSE:3537) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Shoei YakuhinLtd (TSE:3537) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shoei YakuhinLtd:

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

0.054 = JP¥560m ÷ (JP¥18b - JP¥7.6b) (Based on the trailing twelve months to December 2024).

Therefore, Shoei YakuhinLtd has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.2%.

See our latest analysis for Shoei YakuhinLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shoei YakuhinLtd's ROCE against it's prior returns. If you'd like to look at how Shoei YakuhinLtd has performed in the past in other metrics, you can view this free graph of Shoei YakuhinLtd's past earnings, revenue and cash flow.

What Can We Tell From Shoei YakuhinLtd's ROCE Trend?

Shoei YakuhinLtd has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 256% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, Shoei YakuhinLtd's current liabilities are still rather high at 42% 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.

The Key Takeaway

To bring it all together, Shoei YakuhinLtd has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 2 warning signs for Shoei YakuhinLtd that we think you should be aware of.

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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.