Investors Could Be Concerned With Chuo SpringLtd's (TSE:5992) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Chuo SpringLtd (TSE:5992) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Chuo SpringLtd, this is the formula:

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

0.0079 = JP¥1.1b ÷ (JP¥154b - JP¥20b) (Based on the trailing twelve months to March 2024).

So, Chuo SpringLtd has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.5%.

See our latest analysis for Chuo SpringLtd

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 Chuo SpringLtd.

The Trend Of ROCE

When we looked at the ROCE trend at Chuo SpringLtd, we didn't gain much confidence. Around five years ago the returns on capital were 3.3%, but since then they've fallen to 0.8%. However it looks like Chuo SpringLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Chuo SpringLtd's ROCE

In summary, Chuo SpringLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 84% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Chuo SpringLtd does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

While Chuo SpringLtd 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.