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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Takamisawa Cybernetics Company (TYO:6424) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.11 = JP¥680m ÷ (JP¥14b - JP¥7.8b) (Based on the trailing twelve months to December 2020).

Thus, Takamisawa Cybernetics Company has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Electronic industry average of 7.3% it's much better.

View our latest analysis for Takamisawa Cybernetics Company

Historical performance is a great place to start when researching a stock so above you can see the gauge for Takamisawa Cybernetics Company's ROCE against it's prior returns. If you'd like to look at how Takamisawa Cybernetics Company 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

There hasn't been much to report for Takamisawa Cybernetics Company's returns and its level of capital employed because both metrics have been steady for the past 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 don't be surprised if Takamisawa Cybernetics Company doesn't end up being a multi-bagger in a few years time.

On a side note, Takamisawa Cybernetics Company's current liabilities are still rather high at 55% 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.

What We Can Learn From Takamisawa Cybernetics Company's ROCE

In a nutshell, Takamisawa Cybernetics Company has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 65% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Takamisawa Cybernetics Company, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.

If you’re looking to trade Takamisawa Cybernetics Company, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.