Takahashi Curtain Wall (TYO:1994) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 Takahashi Curtain Wall (TYO:1994) 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)

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. The formula for this calculation on Takahashi Curtain Wall is:

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

0.082 = JP¥840m ÷ (JP¥13b - JP¥2.4b) (Based on the trailing twelve months to December 2020).

Thus, Takahashi Curtain Wall has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

Check out our latest analysis for Takahashi Curtain Wall

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, revenue and cash flow of Takahashi Curtain Wall, check out these free graphs here.

So How Is Takahashi Curtain Wall's ROCE Trending?

When we looked at the ROCE trend at Takahashi Curtain Wall, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Takahashi Curtain Wall 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. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Takahashi Curtain Wall's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Takahashi Curtain Wall have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 67% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Takahashi Curtain Wall, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Takahashi Curtain Wall 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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