Slowing Rates Of Return At SEIKOH GIKEN (TYO:6834) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at SEIKOH GIKEN (TYO:6834), it didn't seem to tick all of these boxes.

What is 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 SEIKOH GIKEN, this is the formula:

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

0.047 = JP¥1.2b ÷ (JP¥28b - JP¥3.0b) (Based on the trailing twelve months to December 2020).

Therefore, SEIKOH GIKEN has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.3%.

Check out our latest analysis for SEIKOH GIKEN

In the above chart we have measured SEIKOH GIKEN's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SEIKOH GIKEN.

What Does the ROCE Trend For SEIKOH GIKEN Tell Us?

Over the past five years, SEIKOH GIKEN's ROCE and capital employed have both remained mostly flat. 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 SEIKOH GIKEN doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

We can conclude that in regards to SEIKOH GIKEN's returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 101% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching SEIKOH GIKEN, you might be interested to know about the 1 warning sign that our analysis has discovered.

While SEIKOH GIKEN isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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