Should We Be Excited About The Trends Of Returns At Ryoyu Systems (TYO:4685)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Ryoyu Systems (TYO:4685) looks decent, right now, so lets see what the trend of returns can tell us.

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

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. The formula for this calculation on Ryoyu Systems is:

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

0.15 = JP¥2.1b ÷ (JP¥18b - JP¥4.1b) (Based on the trailing twelve months to December 2020).

Thus, Ryoyu Systems has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 13%.

Check out our latest analysis for Ryoyu Systems

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 Ryoyu Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. The company has employed 34% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

To sum it up, Ryoyu Systems has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 176% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Ryoyu Systems you'll probably want to know about.

While Ryoyu Systems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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