Some Investors May Be Worried About Totetsu Kogyo's (TSE:1835) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Totetsu Kogyo (TSE:1835), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Totetsu Kogyo is:

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

0.10 = JP¥12b ÷ (JP¥168b - JP¥53b) (Based on the trailing twelve months to March 2024).

So, Totetsu Kogyo has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Construction industry.

See our latest analysis for Totetsu Kogyo

Above you can see how the current ROCE for Totetsu Kogyo 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 analyst report for Totetsu Kogyo .

So How Is Totetsu Kogyo's ROCE Trending?

When we looked at the ROCE trend at Totetsu Kogyo, we didn't gain much confidence. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Totetsu Kogyo's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Totetsu Kogyo. These trends are starting to be recognized by investors since the stock has delivered a 9.2% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, Totetsu Kogyo does come with some risks, and we've found 1 warning sign that you should be aware of.

While Totetsu Kogyo 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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