What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at SokenshaLtd (TYO:7413) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SokenshaLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = JP¥53m ÷ (JP¥2.9b - JP¥1.1b) (Based on the trailing twelve months to September 2020).
Therefore, SokenshaLtd has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.0%.
See our latest analysis for SokenshaLtd
Historical performance is a great place to start when researching a stock so above you can see the gauge for SokenshaLtd's ROCE against it's prior returns. If you'd like to look at how SokenshaLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is SokenshaLtd's ROCE Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 2.9%. The amount of capital employed has increased too, by 21%. So we're very much inspired by what we're seeing at SokenshaLtd thanks to its ability to profitably reinvest capital.
The Key Takeaway
To sum it up, SokenshaLtd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 13% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
SokenshaLtd does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
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.
If you decide to trade SokenshaLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About TSE:7413
SokenshaLtd
Engages in the wholesale of natural and health foods, and other related products in Japan.
Proven track record with adequate balance sheet.
