Kawasaki Kisen Kaisha's (TSE:9107) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Kawasaki Kisen Kaisha (TSE:9107) looks quite promising in regards to its trends of return on capital.

Understanding 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 Kawasaki Kisen Kaisha is:

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

0.053 = JP¥101b ÷ (JP¥2.1t - JP¥183b) (Based on the trailing twelve months to September 2024).

Thus, Kawasaki Kisen Kaisha has an ROCE of 5.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.

Check out our latest analysis for Kawasaki Kisen Kaisha

Above you can see how the current ROCE for Kawasaki Kisen Kaisha compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kawasaki Kisen Kaisha for free.

So How Is Kawasaki Kisen Kaisha's ROCE Trending?

Kawasaki Kisen Kaisha has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.3% which is a sight for sore eyes. Not only that, but the company is utilizing 162% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 8.8%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Kawasaki Kisen Kaisha's ROCE

To the delight of most shareholders, Kawasaki Kisen Kaisha has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Kawasaki Kisen Kaisha does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Kawasaki Kisen Kaisha 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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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.