Our Take On The Returns On Capital At Takamisawa Cybernetics Company (TYO:6424)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Takamisawa Cybernetics Company (TYO:6424) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Takamisawa Cybernetics Company, this is the formula:

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

0.095 = JP¥570m ÷ (JP¥13b - JP¥7.1b) (Based on the trailing twelve months to September 2020).

Thus, Takamisawa Cybernetics Company has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 7.0%.

View our latest analysis for Takamisawa Cybernetics Company

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 Takamisawa Cybernetics Company's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Takamisawa Cybernetics Company Tell Us?

Things have been pretty stable at Takamisawa Cybernetics Company, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Takamisawa Cybernetics Company in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Takamisawa Cybernetics Company's current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

We can conclude that in regards to Takamisawa Cybernetics Company's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 63% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Takamisawa Cybernetics Company (of which 2 are significant!) that you should know about.

While Takamisawa Cybernetics Company 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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