Sanyei's (TSE:8119) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sanyei (TSE:8119) looks quite promising in regards to its trends of return on capital.

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Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Sanyei:

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

0.15 = JP¥2.3b ÷ (JP¥22b - JP¥6.8b) (Based on the trailing twelve months to December 2024).

So, Sanyei has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 7.2% it's much better.

Check out our latest analysis for Sanyei

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

What Can We Tell From Sanyei's ROCE Trend?

Sanyei has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 43% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Sanyei's ROCE

In summary, we're delighted to see that Sanyei has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 4 warning signs with Sanyei and understanding these should be part of your investment process.

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. 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.