The Returns At Fukuda Denshi (TYO:6960) Aren't Growing

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Fukuda Denshi's (TYO:6960) trend of ROCE, we liked what we saw.

What is 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 Fukuda Denshi, this is the formula:

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

0.11 = JP¥16b ÷ (JP¥175b - JP¥36b) (Based on the trailing twelve months to December 2020).

Thus, Fukuda Denshi has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Medical Equipment industry.

Check out our latest analysis for Fukuda Denshi

In the above chart we have measured Fukuda Denshi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fukuda Denshi here for free.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 35% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Fukuda Denshi has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Fukuda Denshi's ROCE

To sum it up, Fukuda Denshi has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 68% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Fukuda Denshi we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While Fukuda Denshi 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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This article by Simply Wall St is general in nature. 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.
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