We Like These Underlying Return On Capital Trends At Sumitomo Forestry (TSE:1911)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Sumitomo Forestry (TSE:1911) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Sumitomo Forestry:

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

0.12 = JP¥163b ÷ (JP¥1.9t - JP¥610b) (Based on the trailing twelve months to March 2024).

Thus, Sumitomo Forestry has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Consumer Durables industry.

See our latest analysis for Sumitomo Forestry

In the above chart we have measured Sumitomo Forestry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sumitomo Forestry .

So How Is Sumitomo Forestry's ROCE Trending?

Sumitomo Forestry is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 120%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Sumitomo Forestry's ROCE

To sum it up, Sumitomo Forestry has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 501% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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