Returns Are Gaining Momentum At Kikusui Chemical Industries (TSE:7953)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Kikusui Chemical Industries (TSE:7953) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Kikusui Chemical Industries, this is the formula:

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

0.049 = JP¥555m ÷ (JP¥18b - JP¥6.8b) (Based on the trailing twelve months to March 2024).

So, Kikusui Chemical Industries has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Building industry average of 7.5%.

Check out our latest analysis for Kikusui Chemical Industries

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

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Kikusui Chemical Industries promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 111% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that Kikusui Chemical Industries has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 9.4% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Kikusui Chemical Industries does have some risks though, and we've spotted 2 warning signs for Kikusui Chemical Industries that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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