What Satoh's (TYO:9996) Returns On Capital Can Tell Us

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Satoh (TYO:9996), so let's see why.

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. To calculate this metric for Satoh, this is the formula:

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

0.042 = JP¥1.0b ÷ (JP¥32b - JP¥7.9b) (Based on the trailing twelve months to September 2020).

Therefore, Satoh has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 8.7%.

Check out our latest analysis for Satoh

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

What Does the ROCE Trend For Satoh Tell Us?

In terms of Satoh's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Satoh becoming one if things continue as they have.

The Bottom Line On Satoh's ROCE

In summary, it's unfortunate that Satoh is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 40% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Satoh does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Satoh 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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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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