Returns On Capital At TOBA (TYO:7472) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating TOBA (TYO:7472), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for TOBA:

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

0.072 = JP¥1.3b ÷ (JP¥25b - JP¥7.3b) (Based on the trailing twelve months to September 2020).

Thus, TOBA has an ROCE of 7.2%. On its own, that's a low figure but it's around the 6.3% average generated by the Trade Distributors industry.

See 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're interested in investigating TOBA's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From TOBA's ROCE Trend?

The returns on capital haven't changed much for TOBA in recent years. Over the past four years, ROCE has remained relatively flat at around 7.2% and the business has deployed 25% more capital into its operations. 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.

What We Can Learn From TOBA's ROCE

In summary, TOBA has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you're still interested in TOBA it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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