Does Kaitori Okoku's (TYO:3181) Returns On Capital Reflect Well On The Business?

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. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Kaitori Okoku (TYO:3181), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kaitori Okoku is:

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

0.051 = JP¥138m ÷ (JP¥3.4b - JP¥682m) (Based on the trailing twelve months to August 2020).

So, Kaitori Okoku has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 8.8%.

View our latest analysis for Kaitori Okoku

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

So How Is Kaitori Okoku's ROCE Trending?

In terms of Kaitori Okoku's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kaitori Okoku becoming one if things continue as they have.

What We Can Learn From Kaitori Okoku's ROCE

In summary, it's unfortunate that Kaitori Okoku is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Kaitori Okoku (including 1 which is is significant) .

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

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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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