Kurashicom (TSE:7110) Might Be Having Difficulty Using Its Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So while Kurashicom (TSE:7110) has a high ROCE right now, lets see what we can decipher from how returns are changing.

What Is 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 Kurashicom is:

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

0.24 = JP¥1.0b ÷ (JP¥5.1b - JP¥772m) (Based on the trailing twelve months to April 2023).

Therefore, Kurashicom has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Multiline Retail industry average of 9.4%.

See our latest analysis for Kurashicom

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kurashicom has performed in the past in other metrics, you can view this free graph of Kurashicom's past earnings, revenue and cash flow.

What Can We Tell From Kurashicom's ROCE Trend?

On the surface, the trend of ROCE at Kurashicom doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 36% where it was one year ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Kurashicom's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kurashicom is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 39% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Kurashicom does have some risks though, and we've spotted 3 warning signs for Kurashicom that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.