Returns At TOBA (TYO:7472) Appear To Be Weighed Down

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 TOBA (TYO:7472) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for TOBA, this is the formula:

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

0.067 = JP¥1.2b ÷ (JP¥27b - JP¥8.1b) (Based on the trailing twelve months to December 2020).

Thus, TOBA has an ROCE of 6.7%. On its own, that's a low figure but it's around the 6.3% average generated by the Trade Distributors industry.

View our latest analysis for TOBA

Historical performance is a great place to start when researching a stock so above you can see the gauge for TOBA's ROCE against it's prior returns. If you'd like to look at how TOBA 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 TOBA's ROCE Trend?

In terms of TOBA's historical ROCE trend, it doesn't exactly demand attention. The company has employed 25% more capital in the last four years, and the returns on that capital have remained stable at 6.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On TOBA's ROCE

As we've seen above, TOBA's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

While TOBA 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.

While TOBA 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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