The Returns On Capital At Hikari Heights-VarusLtd (SPSE:2137) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Hikari Heights-VarusLtd (SPSE:2137), we weren't too upbeat about how things were going.

What is 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. Analysts use this formula to calculate it for Hikari Heights-VarusLtd:

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

0.017 = JP¥111m ÷ (JP¥7.6b - JP¥919m) (Based on the trailing twelve months to September 2020).

Therefore, Hikari Heights-VarusLtd has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.3%.

View our latest analysis for Hikari Heights-VarusLtd

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

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Hikari Heights-VarusLtd. Unfortunately the returns on capital have diminished from the 5.3% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hikari Heights-VarusLtd becoming one if things continue as they have.

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 13% 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.

Hikari Heights-VarusLtd does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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