Should We Be Excited About The Trends Of Returns At Taiyo KisokogyoLtd (TYO:1758)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Taiyo KisokogyoLtd (TYO:1758) 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)

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 Taiyo KisokogyoLtd:

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

0.071 = JP¥541m ÷ (JP¥11b - JP¥3.0b) (Based on the trailing twelve months to July 2020).

So, Taiyo KisokogyoLtd has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for Taiyo KisokogyoLtd

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Taiyo KisokogyoLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 9.7% over the last five years. 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.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Taiyo KisokogyoLtd is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 42% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Taiyo KisokogyoLtd, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Taiyo KisokogyoLtd 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. 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.
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