Hashimoto Sogyo HoldingsLtd (TSE:7570) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Hashimoto Sogyo HoldingsLtd (TSE:7570), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Hashimoto Sogyo HoldingsLtd:

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

0.054 = JP¥2.3b ÷ (JP¥109b - JP¥67b) (Based on the trailing twelve months to December 2024).

Thus, Hashimoto Sogyo HoldingsLtd has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.2%.

See our latest analysis for Hashimoto Sogyo HoldingsLtd

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're interested in investigating Hashimoto Sogyo HoldingsLtd's past further, check out this free graph covering Hashimoto Sogyo HoldingsLtd's past earnings, revenue and cash flow .

How Are Returns Trending?

When we looked at the ROCE trend at Hashimoto Sogyo HoldingsLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.4% from 11% five years ago. However it looks like Hashimoto Sogyo HoldingsLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

On a side note, Hashimoto Sogyo HoldingsLtd's current liabilities are still rather high at 61% 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 Hashimoto Sogyo HoldingsLtd's ROCE

To conclude, we've found that Hashimoto Sogyo HoldingsLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 54% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Hashimoto Sogyo HoldingsLtd does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Hashimoto Sogyo HoldingsLtd 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.