S.IshimitsuLtd (TYO:2750) Is Looking To Continue Growing Its Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in S.IshimitsuLtd's (TYO:2750) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on S.IshimitsuLtd is:

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

0.038 = JP¥630m ÷ (JP¥29b - JP¥12b) (Based on the trailing twelve months to December 2020).

So, S.IshimitsuLtd has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.8%.

See our latest analysis for S.IshimitsuLtd

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 S.IshimitsuLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For S.IshimitsuLtd Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 3.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 42%. So we're very much inspired by what we're seeing at S.IshimitsuLtd thanks to its ability to profitably reinvest capital.

Another thing to note, S.IshimitsuLtd has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From S.IshimitsuLtd's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what S.IshimitsuLtd has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 44% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 3 warning signs we've spotted with S.IshimitsuLtd (including 1 which is a bit unpleasant) .

While S.IshimitsuLtd 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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