Kakiyasu Honten's (TSE:2294) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So, when we ran our eye over Kakiyasu Honten's (TSE:2294) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kakiyasu Honten, this is the formula:

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

0.17 = JP¥3.0b ÷ (JP¥22b - JP¥4.3b) (Based on the trailing twelve months to April 2023).

So, Kakiyasu Honten has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

View our latest analysis for Kakiyasu Honten

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kakiyasu Honten's ROCE against it's prior returns. If you're interested in investigating Kakiyasu Honten's past further, check out this free graph covering Kakiyasu Honten's past earnings, revenue and cash flow.

What Can We Tell From Kakiyasu Honten's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 21% in that time. 17% is a pretty standard return, and it provides some comfort knowing that Kakiyasu Honten has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Kakiyasu Honten has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 61% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 1 warning sign for Kakiyasu Honten you'll probably want to know about.

While Kakiyasu Honten 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. 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.