Some Investors May Be Worried About KIMURA KOHKILtd's (TSE:6231) Returns On Capital

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at KIMURA KOHKILtd (TSE:6231) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for KIMURA KOHKILtd:

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

0.18 = JP¥2.7b ÷ (JP¥20b - JP¥5.1b) (Based on the trailing twelve months to March 2024).

Therefore, KIMURA KOHKILtd has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 7.1% it's much better.

View our latest analysis for KIMURA KOHKILtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for KIMURA KOHKILtd'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 KIMURA KOHKILtd.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at KIMURA KOHKILtd doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that KIMURA KOHKILtd is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 147% return over the last three years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching KIMURA KOHKILtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While KIMURA KOHKILtd 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.