Investors Could Be Concerned With Komaihaltec's (TSE:5915) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Komaihaltec (TSE:5915), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Komaihaltec, this is the formula:

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

0.014 = JP¥724m ÷ (JP¥77b - JP¥26b) (Based on the trailing twelve months to March 2024).

Therefore, Komaihaltec has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.9%.

Check out our latest analysis for Komaihaltec

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

What Can We Tell From Komaihaltec's ROCE Trend?

In terms of Komaihaltec's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 5.4% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Komaihaltec's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Komaihaltec is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 16% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 4 warning signs we've spotted with Komaihaltec (including 2 which make us uncomfortable) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com