Slowing Rates Of Return At Chugai Ro (TSE:1964) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Chugai Ro (TSE:1964) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Chugai Ro:

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

0.047 = JP¥1.5b ÷ (JP¥49b - JP¥18b) (Based on the trailing twelve months to March 2024).

Therefore, Chugai Ro has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.0%.

Check out our latest analysis for Chugai Ro

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chugai Ro's ROCE against it's prior returns. If you'd like to look at how Chugai Ro has performed in the past in other metrics, you can view this free graph of Chugai Ro's past earnings, revenue and cash flow.

What Does the ROCE Trend For Chugai Ro Tell Us?

In terms of Chugai Ro's historical ROCE trend, it doesn't exactly demand attention. The company has employed 36% more capital in the last five years, and the returns on that capital have remained stable at 4.7%. 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.

On a side note, Chugai Ro has done well to reduce current liabilities to 36% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Chugai Ro's ROCE

In conclusion, Chugai Ro has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 126% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 3 warning signs facing Chugai Ro that you might find interesting.

While Chugai Ro isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com