Kyokuto Kaihatsu KogyoLtd (TSE:7226) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Kyokuto Kaihatsu KogyoLtd (TSE:7226) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kyokuto Kaihatsu KogyoLtd is:

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

0.043 = JP¥5.8b ÷ (JP¥168b - JP¥33b) (Based on the trailing twelve months to June 2024).

Thus, Kyokuto Kaihatsu KogyoLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.1%.

See our latest analysis for Kyokuto Kaihatsu KogyoLtd

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Kyokuto Kaihatsu KogyoLtd doesn't inspire confidence. Around five years ago the returns on capital were 8.5%, but since then they've fallen to 4.3%. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kyokuto Kaihatsu KogyoLtd. And the stock has followed suit returning a meaningful 71% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Kyokuto Kaihatsu KogyoLtd does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Kyokuto Kaihatsu KogyoLtd 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.