Investors Will Want Chudenko's (TSE:1941) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Chudenko (TSE:1941) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Chudenko:

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

0.052 = JP¥12b ÷ (JP¥281b - JP¥53b) (Based on the trailing twelve months to March 2024).

Therefore, Chudenko has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.7%.

View our latest analysis for Chudenko

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 Chudenko has performed in the past in other metrics, you can view this free graph of Chudenko's past earnings, revenue and cash flow.

What Does the ROCE Trend For Chudenko Tell Us?

Chudenko is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 83% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line

To sum it up, Chudenko is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Chudenko, we've discovered 1 warning sign that you should be aware of.

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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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.