These Return Metrics Don't Make Flying Garden (TYO:3317) Look Too Strong

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Flying Garden (TYO:3317), we weren't too upbeat about how things were going.

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. The formula for this calculation on Flying Garden is:

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

0.057 = JP¥142m ÷ (JP¥3.4b - JP¥951m) (Based on the trailing twelve months to December 2020).

So, Flying Garden has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.5%.

Check out our latest analysis for Flying Garden

Historical performance is a great place to start when researching a stock so above you can see the gauge for Flying Garden's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Flying Garden, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Flying Garden, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Flying Garden becoming one if things continue as they have.

The Bottom Line On Flying Garden's ROCE

In summary, it's unfortunate that Flying Garden is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 87% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Flying Garden does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Flying Garden 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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