Yukiguni Maitake's (TSE:1375) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Yukiguni Maitake (TSE:1375), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Yukiguni Maitake is:

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

0.22 = JP¥3.0b ÷ (JP¥41b - JP¥27b) (Based on the trailing twelve months to December 2023).

Therefore, Yukiguni Maitake has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Food industry average of 6.8%.

See our latest analysis for Yukiguni Maitake

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Yukiguni Maitake's past further, check out this free graph covering Yukiguni Maitake's past earnings, revenue and cash flow.

What Does the ROCE Trend For Yukiguni Maitake Tell Us?

Over the past five years, Yukiguni Maitake's ROCE has remained relatively flat while the business is using 50% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. But we have to give it to Yukiguni Maitake because the returns on the capital it is employing are still high in relative terms.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 66% of total assets, this reported ROCE would probably be less than22% because total capital employed would be higher.The 22% ROCE could be even lower if current liabilities weren't 66% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line

Overall, we're not ecstatic to see Yukiguni Maitake reducing the amount of capital it employs in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Yukiguni Maitake, we've spotted 2 warning signs, and 1 of them is significant.

Yukiguni Maitake is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.