Here's What To Make Of Hosoya Pyro-Engineering's (TYO:4274) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Hosoya Pyro-Engineering (TYO:4274) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Hosoya Pyro-Engineering:

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

0.052 = JP¥159m ÷ (JP¥3.8b - JP¥750m) (Based on the trailing twelve months to September 2020).

Therefore, Hosoya Pyro-Engineering has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Leisure industry average of 6.5%.

See our latest analysis for Hosoya Pyro-Engineering

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 Hosoya Pyro-Engineering's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Hosoya Pyro-Engineering, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.2% from 9.7% five years ago. 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'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.

Our Take On Hosoya Pyro-Engineering's ROCE

In summary, Hosoya Pyro-Engineering is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 252% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Hosoya Pyro-Engineering that we think you should be aware of.

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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