Will Powdertech (TYO:5695) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Powdertech (TYO:5695) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Powdertech:

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

0.034 = JP¥419m ÷ (JP¥14b - JP¥1.7b) (Based on the trailing twelve months to December 2020).

So, Powdertech has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 8.4%.

View our latest analysis for Powdertech

Historical performance is a great place to start when researching a stock so above you can see the gauge for Powdertech's ROCE against it's prior returns. If you're interested in investigating Powdertech's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Powdertech's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Powdertech's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Powdertech have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 73% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Powdertech does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While Powdertech 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. 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.
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