Here's What To Make Of SAKAI HoldingsLTD's (TYO:9446) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at SAKAI HoldingsLTD (TYO:9446) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for SAKAI HoldingsLTD, this is the formula:

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

0.076 = JP¥1.5b ÷ (JP¥28b - JP¥8.2b) (Based on the trailing twelve months to September 2020).

So, SAKAI HoldingsLTD has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Specialty Retail industry average of 8.6%.

Check out our latest analysis for SAKAI HoldingsLTD

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

So How Is SAKAI HoldingsLTD's ROCE Trending?

In terms of SAKAI HoldingsLTD's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 7.6%. However it looks like SAKAI HoldingsLTD might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, SAKAI HoldingsLTD has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by SAKAI HoldingsLTD's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing SAKAI HoldingsLTD we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

While SAKAI HoldingsLTD 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 SAKAI HoldingsLTD, 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@simplywallst.com.