Kanefusa (TSE:5984) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Kanefusa (TSE:5984), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Kanefusa:

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

0.035 = JP¥1.1b ÷ (JP¥35b - JP¥4.4b) (Based on the trailing twelve months to March 2024).

So, Kanefusa has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.9%.

Check out our latest analysis for Kanefusa

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

The Trend Of ROCE

When we looked at the ROCE trend at Kanefusa, we didn't gain much confidence. Around five years ago the returns on capital were 8.0%, but since then they've fallen to 3.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Kanefusa's ROCE

In summary, Kanefusa is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing, we've spotted 2 warning signs facing Kanefusa that you might find interesting.

While Kanefusa 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.