Returns On Capital Signal Tricky Times Ahead For Hyoki Kaiun Kaisha (TSE:9362)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Hyoki Kaiun Kaisha (TSE:9362), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Hyoki Kaiun Kaisha:

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

0.036 = JP¥324m ÷ (JP¥13b - JP¥4.2b) (Based on the trailing twelve months to December 2023).

Thus, Hyoki Kaiun Kaisha has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Shipping industry average of 4.7%.

View our latest analysis for Hyoki Kaiun Kaisha

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hyoki Kaiun Kaisha.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Hyoki Kaiun Kaisha doesn't inspire confidence. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 3.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Hyoki Kaiun Kaisha has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

We're a bit apprehensive about Hyoki Kaiun Kaisha because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 216% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing: We've identified 5 warning signs with Hyoki Kaiun Kaisha (at least 1 which is concerning) , and understanding these would certainly be useful.

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. 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.