The Returns On Capital At Seki (TYO:7857) Don't Inspire Confidence

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Seki (TYO:7857), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 Seki is:

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

0.0025 = JP¥38m ÷ (JP¥19b - JP¥3.9b) (Based on the trailing twelve months to December 2020).

So, Seki has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.3%.

View our latest analysis for Seki

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

So How Is Seki's ROCE Trending?

In terms of Seki's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Seki becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Seki is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Seki does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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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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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