Stock Analysis

Our Take On The Returns On Capital At Kotobukiya (TYO:7809)

TSE:7809
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What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Kotobukiya (TYO:7809) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Kotobukiya:

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

0.064 = JP¥409m ÷ (JP¥7.6b - JP¥1.3b) (Based on the trailing twelve months to September 2020).

Therefore, Kotobukiya has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

See our latest analysis for Kotobukiya

roce
JASDAQ:7809 Return on Capital Employed December 17th 2020

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kotobukiya's ROCE against it's prior returns. If you'd like to look at how Kotobukiya has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Kotobukiya doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.4% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 Kotobukiya's ROCE

Bringing it all together, while we're somewhat encouraged by Kotobukiya's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Kotobukiya (of which 2 are a bit concerning!) that you should know about.

While Kotobukiya 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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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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