Returns On Capital - An Important Metric For Yamano Holdings (TYO:7571)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Yamano Holdings' (TYO:7571) returns on capital, so let's have a look.

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. The formula for this calculation on Yamano Holdings is:

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

0.065 = JP¥208m ÷ (JP¥11b - JP¥7.8b) (Based on the trailing twelve months to December 2020).

Therefore, Yamano Holdings has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Retail Distributors industry average of 8.1%.

See our latest analysis for Yamano Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Yamano Holdings' ROCE against it's prior returns. If you'd like to look at how Yamano Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Yamano Holdings. We found that the returns on capital employed over the last five years have risen by 106%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 44% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, Yamano Holdings' current liabilities are still rather high at 71% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Yamano Holdings' ROCE

In summary, it's great to see that Yamano Holdings has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 14% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Yamano Holdings we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

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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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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