Capital Allocation Trends At Okamoto Machine Tool Works (TSE:6125) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Okamoto Machine Tool Works (TSE:6125), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Okamoto Machine Tool Works, this is the formula:

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

0.095 = JP¥4.3b ÷ (JP¥68b - JP¥22b) (Based on the trailing twelve months to June 2024).

Thus, Okamoto Machine Tool Works has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.1% average generated by the Machinery industry.

Check out our latest analysis for Okamoto Machine Tool Works

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Okamoto Machine Tool Works.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 21% five years ago, while capital employed has grown 159%. Usually this isn't ideal, but given Okamoto Machine Tool Works conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Okamoto Machine Tool Works might not have received a full period of earnings contribution from it.

On a side note, Okamoto Machine Tool Works has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Okamoto Machine Tool Works' ROCE

In summary, Okamoto Machine Tool Works is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Okamoto Machine Tool Works you'll probably want to know about.

While Okamoto Machine Tool Works 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.