KOSE R.E.Ltd's (TSE:3246) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think KOSE R.E.Ltd (TSE:3246) 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)

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 KOSE R.E.Ltd:

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

0.14 = JP¥1.6b ÷ (JP¥15b - JP¥2.7b) (Based on the trailing twelve months to January 2024).

So, KOSE R.E.Ltd has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Consumer Durables industry.

See our latest analysis for KOSE R.E.Ltd

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

How Are Returns Trending?

Over the past five years, KOSE R.E.Ltd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if KOSE R.E.Ltd doesn't end up being a multi-bagger in a few years time.

What We Can Learn From KOSE R.E.Ltd's ROCE

In a nutshell, KOSE R.E.Ltd has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 28% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to continue researching KOSE R.E.Ltd, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.