What Do The Returns On Capital At Kyoei Security Service (TYO:7058) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 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)?

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. The formula for this calculation on Kyoei Security Service is:

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

0.094 = JP¥395m ÷ (JP¥5.0b - JP¥810m) (Based on the trailing twelve months to September 2020).

So, Kyoei Security Service has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 7.8%.

View 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. To be more specific, ROCE has fallen from 14% over the last three years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Kyoei Security Service is reinvesting in the business, but returns have been falling. Since the stock has declined 42% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Kyoei Security Service does have some risks though, and we've spotted 2 warning signs for Kyoei Security Service that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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