Makoto Construction CoLtd (TSE:8995) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Makoto Construction CoLtd (TSE:8995) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is 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 Makoto Construction CoLtd:

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

0.0033 = JP¥20m ÷ (JP¥6.9b - JP¥973m) (Based on the trailing twelve months to March 2025).

Therefore, Makoto Construction CoLtd has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.3%.

View our latest analysis for Makoto Construction CoLtd

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

The Trend Of ROCE

In terms of Makoto Construction CoLtd's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 1.9%, but since then they've fallen to 0.3%. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On Makoto Construction CoLtd's ROCE

Bringing it all together, while we're somewhat encouraged by Makoto Construction CoLtd's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 71% over the last five years, investors must think there's better things to come. 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 final note, you should learn about the 4 warning signs we've spotted with Makoto Construction CoLtd (including 2 which make us uncomfortable) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.