Is Eidai KakoLtd (TYO:7877) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Eidai KakoLtd (TYO:7877), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Eidai KakoLtd:

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

0.0087 = JP¥68m ÷ (JP¥9.0b - JP¥1.2b) (Based on the trailing twelve months to September 2020).

Thus, Eidai KakoLtd has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.3%.

View our latest analysis for Eidai KakoLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eidai KakoLtd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eidai KakoLtd, check out these free graphs here.

What Can We Tell From Eidai KakoLtd's ROCE Trend?

We are a bit worried about the trend of returns on capital at Eidai KakoLtd. Unfortunately the returns on capital have diminished from the 2.4% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Eidai KakoLtd becoming one if things continue as they have.

Our Take On Eidai KakoLtd's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 23% 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.

Like most companies, Eidai KakoLtd does come with some risks, and we've found 4 warning signs that you should be aware of.

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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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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