There's Been No Shortage Of Growth Recently For Taiheiyo Kouhatsu's (TSE:8835) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Taiheiyo Kouhatsu (TSE:8835) so let's look a bit deeper.

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. To calculate this metric for Taiheiyo Kouhatsu, this is the formula:

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

0.043 = JP¥1.2b ÷ (JP¥45b - JP¥16b) (Based on the trailing twelve months to March 2024).

Therefore, Taiheiyo Kouhatsu has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.3%.

View our latest analysis for Taiheiyo Kouhatsu

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

What Can We Tell From Taiheiyo Kouhatsu's ROCE Trend?

While there are companies with higher returns on capital out there, we still find the trend at Taiheiyo Kouhatsu promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 33% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Taiheiyo Kouhatsu's ROCE

To bring it all together, Taiheiyo Kouhatsu has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Taiheiyo Kouhatsu (including 2 which make us uncomfortable) .

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.

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