These Metrics Don't Make Hikari Heights-VarusLtd (SPSE:2137) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. So after glancing at the trends within Hikari Heights-VarusLtd (SPSE:2137), we weren't too hopeful.

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 Hikari Heights-VarusLtd is:

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

0.021 = JP¥140m ÷ (JP¥7.6b - JP¥913m) (Based on the trailing twelve months to December 2020).

So, Hikari Heights-VarusLtd has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 10%.

Check out our latest analysis for Hikari Heights-VarusLtd

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 want to delve into the historical earnings, revenue and cash flow of Hikari Heights-VarusLtd, check out these free graphs here.

What Does the ROCE Trend For Hikari Heights-VarusLtd Tell Us?

In terms of Hikari Heights-VarusLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.7% 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. If these trends continue, we wouldn't expect Hikari Heights-VarusLtd to turn into a multi-bagger.

Our Take On Hikari Heights-VarusLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Hikari Heights-VarusLtd (of which 1 doesn't sit too well with us!) that you should know about.

While Hikari Heights-VarusLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you decide to trade Hikari Heights-VarusLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.