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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kycom Holdings' (TYO:9685) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Kycom Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = JP¥342m ÷ (JP¥5.7b - JP¥1.4b) (Based on the trailing twelve months to December 2020).
Thus, Kycom Holdings has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 15%.
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're interested in investigating Kycom Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 7.8%. The amount of capital employed has increased too, by 31%. So we're very much inspired by what we're seeing at Kycom Holdings thanks to its ability to profitably reinvest capital.
To sum it up, Kycom Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Kycom Holdings can keep these trends up, it could have a bright future ahead.
Kycom Holdings does have some risks, we noticed 5 warning signs (and 1 which is concerning) we think you should know about.
While Kycom Holdings 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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