Returns At Sankyo Kasei (TSE:8138) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Sankyo Kasei (TSE:8138) and its trend of ROCE, we really liked what we saw.

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 Sankyo Kasei is:

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

0.034 = JP¥382m ÷ (JP¥18b - JP¥6.6b) (Based on the trailing twelve months to March 2024).

Thus, Sankyo Kasei has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.4%.

View our latest analysis for Sankyo Kasei

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

What Can We Tell From Sankyo Kasei's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Sankyo Kasei promising. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 51% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Sankyo Kasei's ROCE

As discussed above, Sankyo Kasei appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 59% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Sankyo Kasei you'll probably want to know about.

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.

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