What Do The Returns On Capital At Honyaku Center (TYO:2483) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Honyaku Center (TYO:2483) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Honyaku Center is:

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

0.10 = JP¥459m ÷ (JP¥5.8b - JP¥1.3b) (Based on the trailing twelve months to September 2020).

So, Honyaku Center has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Commercial Services industry.

Check out our latest analysis for Honyaku Center

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 want to delve into the historical earnings, revenue and cash flow of Honyaku Center, check out these free graphs here.

What Does the ROCE Trend For Honyaku Center Tell Us?

When we looked at the ROCE trend at Honyaku Center, we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Honyaku Center's ROCE

In summary, we're somewhat concerned by Honyaku Center's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Honyaku Center does have some risks, we noticed 5 warning signs (and 1 which can't be ignored) we think you should know about.

While Honyaku Center may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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