Here's What To Make Of Ishikawa Seisakusho's (TSE:6208) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating Ishikawa Seisakusho (TSE:6208), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Ishikawa Seisakusho, this is the formula:

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

0.045 = JP¥303m ÷ (JP¥17b - JP¥11b) (Based on the trailing twelve months to June 2024).

So, Ishikawa Seisakusho has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.9%.

See our latest analysis for Ishikawa Seisakusho

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ishikawa Seisakusho's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Ishikawa Seisakusho.

How Are Returns Trending?

There hasn't been much to report for Ishikawa Seisakusho's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Ishikawa Seisakusho to be a multi-bagger going forward.

On a side note, Ishikawa Seisakusho's current liabilities are still rather high at 62% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Ishikawa Seisakusho's ROCE

In summary, Ishikawa Seisakusho isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Ishikawa Seisakusho has the makings of a multi-bagger.

If you want to know some of the risks facing Ishikawa Seisakusho we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.

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.

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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.