Returns On Capital Are Showing Encouraging Signs At Sumitomo Forestry (TSE:1911)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, we've noticed some promising trends at Sumitomo Forestry (TSE:1911) so let's look a bit deeper.

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. To calculate this metric for Sumitomo Forestry, this is the formula:

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

0.12 = JP¥147b ÷ (JP¥1.8t - JP¥588b) (Based on the trailing twelve months to December 2023).

So, Sumitomo Forestry has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.7% generated by the Consumer Durables industry.

Check out our latest analysis for Sumitomo Forestry

Above you can see how the current ROCE for Sumitomo Forestry compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sumitomo Forestry .

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Sumitomo Forestry. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 110% more capital is being employed now too. So we're very much inspired by what we're seeing at Sumitomo Forestry thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Sumitomo Forestry is reaping the rewards from prior investments and is growing its capital base. And a remarkable 250% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Sumitomo Forestry can keep these trends up, it could have a bright future ahead.

Like most companies, Sumitomo Forestry does come with some risks, and we've found 2 warning signs that you should be aware of.

While Sumitomo Forestry 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.