Capital Allocation Trends At Hosoya Pyro-Engineering (TYO:4274) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Hosoya Pyro-Engineering (TYO:4274) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Hosoya Pyro-Engineering is:

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

0.053 = JP¥167m ÷ (JP¥3.9b - JP¥738m) (Based on the trailing twelve months to December 2020).

So, Hosoya Pyro-Engineering has an ROCE of 5.3%. In absolute terms, that's a low return but it's around the Leisure industry average of 6.1%.

View our latest analysis for Hosoya Pyro-Engineering

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hosoya Pyro-Engineering's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hosoya Pyro-Engineering, check out these free graphs here.

What Does the ROCE Trend For Hosoya Pyro-Engineering Tell Us?

When we looked at the ROCE trend at Hosoya Pyro-Engineering, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. However it looks like Hosoya Pyro-Engineering 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.

What We Can Learn From Hosoya Pyro-Engineering's ROCE

To conclude, we've found that Hosoya Pyro-Engineering is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 256% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 1 warning sign with Hosoya Pyro-Engineering and understanding this should be part of your investment process.

While Hosoya Pyro-Engineering 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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