What We Make Of Sanko SangyoLtd's (TYO:7922) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Sanko SangyoLtd (TYO:7922) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.007 = JP¥57m ÷ (JP¥12b - JP¥3.6b) (Based on the trailing twelve months to September 2020).

Thus, Sanko SangyoLtd has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 7.8%.

See our latest analysis for Sanko SangyoLtd

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

What The Trend Of ROCE Can Tell Us

Sanko SangyoLtd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 0.7% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Key Takeaway

In summary, we're delighted to see that Sanko SangyoLtd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 36% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Sanko SangyoLtd (of which 1 is a bit unpleasant!) that you should know about.

While Sanko SangyoLtd 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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