Returns On Capital Are Showing Encouraging Signs At Sanko SangyoLtd (TYO:7922)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Sanko SangyoLtd's (TYO:7922) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sanko SangyoLtd is:

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

0.0021 = JP¥17m ÷ (JP¥12b - JP¥3.4b) (Based on the trailing twelve months to December 2020).

Thus, Sanko SangyoLtd has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.1%.

See our latest analysis for Sanko SangyoLtd

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're interested in investigating Sanko SangyoLtd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sanko SangyoLtd's ROCE Trending?

Shareholders will be relieved that Sanko SangyoLtd has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.2% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

Our Take On Sanko SangyoLtd's ROCE

To sum it up, Sanko SangyoLtd is collecting higher returns from the same amount of capital, and that's impressive. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 3 warning signs with Sanko SangyoLtd (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Sanko SangyoLtd 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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