Returns On Capital At Kyoritsu Computer & CommunicationLtd (TYO:3670) Paint A Concerning Picture

April 13, 2021

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Kyoritsu Computer & CommunicationLtd (TYO:3670), we've spotted some signs that it could be struggling, so let's investigate.

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 Kyoritsu Computer & CommunicationLtd is:

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

0.07 = JP¥147m ÷ (JP¥2.8b - JP¥733m) (Based on the trailing twelve months to November 2020).

So, Kyoritsu Computer & CommunicationLtd has an ROCE of 7.0%. Even though it's in line with the industry average of 7.3%, it's still a low return by itself.

Check out our latest analysis for Kyoritsu Computer & CommunicationLtd

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 Kyoritsu Computer & CommunicationLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Kyoritsu Computer & CommunicationLtd Tell Us?

We are a bit worried about the trend of returns on capital at Kyoritsu Computer & CommunicationLtd. About three years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Kyoritsu Computer & CommunicationLtd to turn into a multi-bagger.

What We Can Learn From Kyoritsu Computer & CommunicationLtd's ROCE

In summary, it's unfortunate that Kyoritsu Computer & CommunicationLtd is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Kyoritsu Computer & CommunicationLtd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Kyoritsu Computer & CommunicationLtd 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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This article by Simply Wall St is general in nature. 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.
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