Here's What We Make Of Kyogoku unyu shoji's (TYO:9073) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Kyogoku unyu shoji (TYO:9073) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Kyogoku unyu shoji is:

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

0.015 = JP¥78m ÷ (JP¥7.4b - JP¥2.3b) (Based on the trailing twelve months to September 2020).

Thus, Kyogoku unyu shoji has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Transportation industry average of 4.9%.

View our latest analysis for Kyogoku unyu shoji

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kyogoku unyu shoji's ROCE against it's prior returns. If you're interested in investigating Kyogoku unyu shoji's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Kyogoku unyu shoji's ROCE Trending?

We are a bit worried about the trend of returns on capital at Kyogoku unyu shoji. Unfortunately the returns on capital have diminished from the 6.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Kyogoku unyu shoji to turn into a multi-bagger.

What We Can Learn From Kyogoku unyu shoji's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Kyogoku unyu shoji, we've spotted 4 warning signs, and 1 of them is significant.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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