Here's What's Concerning About Tokai Rika's (TSE:6995) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Tokai Rika (TSE:6995) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tokai Rika:

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

0.074 = JP¥29b ÷ (JP¥520b - JP¥132b) (Based on the trailing twelve months to March 2024).

Thus, Tokai Rika has an ROCE of 7.4%. Even though it's in line with the industry average of 6.5%, it's still a low return by itself.

View our latest analysis for Tokai Rika

Above you can see how the current ROCE for Tokai Rika compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tokai Rika .

The Trend Of ROCE

When we looked at the ROCE trend at Tokai Rika, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Tokai Rika's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Tokai Rika. Furthermore the stock has climbed 47% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Tokai Rika does come with some risks, and we've found 1 warning sign that you should be aware of.

While Tokai Rika 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.