Returns At Kohoku KogyoLTD (TSE:6524) Appear To Be Weighed Down

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. With that in mind, the ROCE of Kohoku KogyoLTD (TSE:6524) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kohoku KogyoLTD is:

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

0.15 = JP¥3.9b ÷ (JP¥29b - JP¥2.9b) (Based on the trailing twelve months to December 2024).

Thus, Kohoku KogyoLTD has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Electronic industry.

See our latest analysis for Kohoku KogyoLTD

Above you can see how the current ROCE for Kohoku KogyoLTD compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kohoku KogyoLTD .

What The Trend Of ROCE Can Tell Us

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 220% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Kohoku KogyoLTD has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Kohoku KogyoLTD has done well to reduce current liabilities to 10% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

To sum it up, Kohoku KogyoLTD has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last three years the stock has declined 26%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know about the risks facing Kohoku KogyoLTD, we've discovered 1 warning sign that you should be aware of.

While Kohoku KogyoLTD 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.