Returns On Capital At YAKUODO HOLDINGS (TSE:7679) Paint A Concerning Picture

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at YAKUODO HOLDINGS (TSE:7679) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for YAKUODO HOLDINGS, this is the formula:

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

0.10 = JP¥5.5b ÷ (JP¥80b - JP¥26b) (Based on the trailing twelve months to February 2025).

Thus, YAKUODO HOLDINGS has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Consumer Retailing industry.

View our latest analysis for YAKUODO HOLDINGS

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

What The Trend Of ROCE Can Tell Us

In terms of YAKUODO HOLDINGS' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 10%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, YAKUODO HOLDINGS has done well to pay down its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On YAKUODO HOLDINGS' ROCE

Bringing it all together, while we're somewhat encouraged by YAKUODO HOLDINGS' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last five years. Therefore based on the analysis done in this article, we don't think YAKUODO HOLDINGS has the makings of a multi-bagger.

YAKUODO HOLDINGS could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 7679 on our platform quite valuable.

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.