Stock Analysis

Is Toshin GroupLtd (TYO:2761) Shrinking?

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TSE:2761
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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Toshin GroupLtd (TYO:2761), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Toshin GroupLtd:

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

0.043 = JP¥1.7b ÷ (JP¥42b - JP¥3.7b) (Based on the trailing twelve months to August 2020).

Thus, Toshin GroupLtd has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

View our latest analysis for Toshin GroupLtd

roce
JASDAQ:2761 Return on Capital Employed December 27th 2020

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'd like to look at how Toshin GroupLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Toshin GroupLtd's ROCE Trend?

In terms of Toshin GroupLtd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Toshin GroupLtd becoming one if things continue as they have.

The Bottom Line On Toshin GroupLtd's ROCE

In summary, it's unfortunate that Toshin GroupLtd is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 170%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

While Toshin GroupLtd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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About TSE:2761

Toshin Groupltd

Toshin Group co.,ltd. supplies electrical equipment and materials.

Flawless balance sheet with acceptable track record.

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