Returns Are Gaining Momentum At KUWAZAWA Holdings (TSE:8104)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in KUWAZAWA Holdings' (TSE:8104) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for KUWAZAWA Holdings, this is the formula:

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

0.07 = JP¥1.3b ÷ (JP¥44b - JP¥25b) (Based on the trailing twelve months to June 2024).

Therefore, KUWAZAWA Holdings has an ROCE of 7.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.

Check out our latest analysis for KUWAZAWA Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for KUWAZAWA Holdings' ROCE against it's prior returns. If you'd like to look at how KUWAZAWA Holdings has performed in the past in other metrics, you can view this free graph of KUWAZAWA Holdings' past earnings, revenue and cash flow.

What Can We Tell From KUWAZAWA Holdings' ROCE Trend?

KUWAZAWA Holdings' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 28% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, KUWAZAWA Holdings has a high ratio of current liabilities to total assets of 58%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On KUWAZAWA Holdings' ROCE

As discussed above, KUWAZAWA Holdings appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 3 warning signs with KUWAZAWA Holdings (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While KUWAZAWA Holdings 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.