Returns On Capital At TanakaLtd (TSE:7619) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think TanakaLtd (TSE:7619) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for TanakaLtd:

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

0.078 = JP¥1.3b ÷ (JP¥30b - JP¥13b) (Based on the trailing twelve months to December 2024).

Therefore, TanakaLtd has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 7.2%.

See our latest analysis for TanakaLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for TanakaLtd's ROCE against it's prior returns. If you're interested in investigating TanakaLtd's past further, check out this free graph covering TanakaLtd's past earnings, revenue and cash flow .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at TanakaLtd. Over the past five years, ROCE has remained relatively flat at around 7.8% and the business has deployed 23% more capital into its operations. 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, TanakaLtd's current liabilities are still rather high at 43% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

Long story short, while TanakaLtd has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 9.6% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 3 warning signs for TanakaLtd that we think you should be aware of.

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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.