Returns On Capital Signal Tricky Times Ahead For Makoto Construction CoLtd (TSE:8995)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Makoto Construction CoLtd (TSE:8995) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Understanding 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 Makoto Construction CoLtd:

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

0.0046 = JP¥27m ÷ (JP¥7.0b - JP¥1.1b) (Based on the trailing twelve months to December 2024).

So, Makoto Construction CoLtd has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.9%.

View our latest analysis for Makoto Construction CoLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Makoto Construction CoLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Makoto Construction CoLtd.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Makoto Construction CoLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 2.0% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Makoto Construction CoLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 63% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 4 warning signs we've spotted with Makoto Construction CoLtd (including 1 which is a bit unpleasant) .

While Makoto Construction CoLtd 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.