Returns On Capital At Sato Foods Industries (TYO:2814) Paint An Interesting Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Sato Foods Industries (TYO:2814) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Sato Foods Industries is:

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

0.039 = JP¥691m ÷ (JP¥19b - JP¥1.4b) (Based on the trailing twelve months to September 2020).

Therefore, Sato Foods Industries has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.7%.

View our latest analysis for Sato Foods Industries

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

How Are Returns Trending?

On the surface, the trend of ROCE at Sato Foods Industries doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.9% from 5.5% five years ago. 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

In summary, Sato Foods Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 91% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Sato Foods Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Sato Foods Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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