Hikari Food Service's (TSE:138A) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Hikari Food Service (TSE:138A) and its trend of ROCE, we really liked what we saw.

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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 Hikari Food Service, this is the formula:

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

0.11 = JP¥217m ÷ (JP¥2.4b - JP¥519m) (Based on the trailing twelve months to November 2024).

So, Hikari Food Service has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.7% generated by the Hospitality industry.

See our latest analysis for Hikari Food Service

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

So How Is Hikari Food Service's ROCE Trending?

We're delighted to see that Hikari Food Service is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 11% on its capital. And unsurprisingly, like most companies trying to break into the black, Hikari Food Service is utilizing 38% more capital than it was three years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Hikari Food Service's ROCE

In summary, it's great to see that Hikari Food Service has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 51% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 4 warning signs with Hikari Food Service (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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.