Kyoei Security Service (TYO:7058) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Kyoei Security Service (TYO:7058) 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)?

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. Analysts use this formula to calculate it for Kyoei Security Service:

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

0.083 = JP¥350m ÷ (JP¥5.1b - JP¥833m) (Based on the trailing twelve months to December 2020).

Thus, Kyoei Security Service has an ROCE of 8.3%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

Check out our latest analysis for Kyoei Security Service

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 Kyoei Security Service, check out these free graphs here.

The Trend Of ROCE

In terms of Kyoei Security Service's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 13%, but since then they've fallen to 8.3%. However it looks like Kyoei Security Service 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.

Our Take On Kyoei Security Service's ROCE

To conclude, we've found that Kyoei Security Service is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Kyoei Security Service has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for Kyoei Security Service you'll probably want to know about.

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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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