Returns On Capital At Asahi Rubber (TYO:5162) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Asahi Rubber (TYO:5162) and its ROCE trend, we weren't exactly thrilled.

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 Asahi Rubber:

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

0.0062 = JP¥48m ÷ (JP¥10b - JP¥2.7b) (Based on the trailing twelve months to September 2020).

Thus, Asahi Rubber has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 6.8%.

See our latest analysis for Asahi Rubber

Above you can see how the current ROCE for Asahi Rubber compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Asahi Rubber Tell Us?

There are better returns on capital out there than what we're seeing at Asahi Rubber. The company has consistently earned 0.6% for the last five years, and the capital employed within the business has risen 22% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Asahi Rubber's returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 24% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Asahi Rubber does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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