Returns On Capital At Tenox (TYO:1905) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Tenox (TYO:1905) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Tenox, this is the formula:

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

0.017 = JP¥223m ÷ (JP¥16b - JP¥3.0b) (Based on the trailing twelve months to December 2020).

Thus, Tenox has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.9%.

Check out our latest analysis for Tenox

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tenox's ROCE against it's prior returns. If you'd like to look at how Tenox has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Tenox Tell Us?

When we looked at the ROCE trend at Tenox, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 1.7%. 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.

On a side note, Tenox has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Tenox's ROCE

We're a bit apprehensive about Tenox 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 75% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Tenox does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Tenox 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. 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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