There Are Reasons To Feel Uneasy About Takuma's (TSE:6013) Returns On Capital

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 Takuma (TSE:6013) 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 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. The formula for this calculation on Takuma is:

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

0.083 = JP¥10b ÷ (JP¥191b - JP¥68b) (Based on the trailing twelve months to March 2024).

Thus, Takuma has an ROCE of 8.3%. Even though it's in line with the industry average of 8.0%, it's still a low return by itself.

View our latest analysis for Takuma

Above you can see how the current ROCE for Takuma 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 Takuma .

What Can We Tell From Takuma's ROCE Trend?

When we looked at the ROCE trend at Takuma, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Takuma is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 40% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing Takuma we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Takuma 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