Stock Analysis

Should You Be Impressed By Matsumoto Yushi-SeiyakuLtd's (TYO:4365) Returns on Capital?

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TSE:4365
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Matsumoto Yushi-SeiyakuLtd (TYO:4365), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Matsumoto Yushi-SeiyakuLtd:

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

0.064 = JP¥3.7b ÷ (JP¥65b - JP¥7.6b) (Based on the trailing twelve months to December 2020).

So, Matsumoto Yushi-SeiyakuLtd has an ROCE of 6.4%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

View our latest analysis for Matsumoto Yushi-SeiyakuLtd

roce
JASDAQ:4365 Return on Capital Employed February 22nd 2021

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Matsumoto Yushi-SeiyakuLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.4% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Matsumoto Yushi-SeiyakuLtd have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 37% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you're still interested in Matsumoto Yushi-SeiyakuLtd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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About TSE:4365

Matsumoto Yushi-SeiyakuLtd

Matsumoto Yushi-Seiyaku Co.,Ltd. manufactures and markets fiber and textile chemicals, microcapsules, various surfactants, and high polymer based products in Japan and Indonesia.

Flawless balance sheet with solid track record and pays a dividend.

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