What These Trends Mean At Iwatsuka Confectionery (TYO:2221)

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Iwatsuka Confectionery (TYO:2221), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Iwatsuka Confectionery, this is the formula:

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

0.0038 = JP¥246m ÷ (JP¥68b - JP¥3.4b) (Based on the trailing twelve months to September 2020).

So, Iwatsuka Confectionery has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Food industry average of 6.7%.

Check out our latest analysis for Iwatsuka Confectionery

Historical performance is a great place to start when researching a stock so above you can see the gauge for Iwatsuka Confectionery's ROCE against it's prior returns. If you'd like to look at how Iwatsuka Confectionery has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Iwatsuka Confectionery. About five years ago, returns on capital were 0.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Iwatsuka Confectionery to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 21% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

While Iwatsuka Confectionery doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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