Chofu Seisakusho (TSE:5946) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Chofu Seisakusho (TSE:5946) and its trend of ROCE, we really liked what we saw.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Chofu Seisakusho:

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

0.02 = JP¥2.8b ÷ (JP¥145b - JP¥8.9b) (Based on the trailing twelve months to March 2024).

Therefore, Chofu Seisakusho has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.6%.

Check out our latest analysis for Chofu Seisakusho

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

How Are Returns Trending?

While there are companies with higher returns on capital out there, we still find the trend at Chofu Seisakusho promising. The figures show that over the last five years, ROCE has grown 26% whilst employing roughly the same amount of capital. 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.

The Bottom Line On Chofu Seisakusho's ROCE

In summary, we're delighted to see that Chofu Seisakusho has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 5946 on our platform that is definitely worth checking out.

While Chofu Seisakusho 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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