The Returns At Seigakusya (TYO:2179) Provide Us With Signs Of What's To Come

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Seigakusya (TYO:2179), it didn't seem to tick all of these boxes.

Understanding 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 Seigakusya:

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

0.025 = JP¥127m ÷ (JP¥8.4b - JP¥3.2b) (Based on the trailing twelve months to September 2020).

Therefore, Seigakusya has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.0%.

See our latest analysis for Seigakusya

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

The Trend Of ROCE

In terms of Seigakusya's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Seigakusya is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Seigakusya (including 2 which are a bit unpleasant) .

While Seigakusya 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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