There Are Reasons To Feel Uneasy About Ryohin Keikaku's (TSE:7453) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Ryohin Keikaku (TSE:7453) 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. The formula for this calculation on Ryohin Keikaku is:

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

0.12 = JP¥42b ÷ (JP¥471b - JP¥129b) (Based on the trailing twelve months to November 2023).

Thus, Ryohin Keikaku has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 9.4% it's much better.

Check out our latest analysis for Ryohin Keikaku

Above you can see how the current ROCE for Ryohin Keikaku compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Ryohin Keikaku .

So How Is Ryohin Keikaku's ROCE Trending?

On the surface, the trend of ROCE at Ryohin Keikaku doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Ryohin Keikaku in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 31% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Ryohin Keikaku could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 7453 on our platform quite valuable.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.