Returns On Capital At Tone (TSE:5967) Paint A Concerning Picture

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Tone (TSE:5967) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 Tone is:

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

0.10 = JP¥1.1b ÷ (JP¥12b - JP¥1.4b) (Based on the trailing twelve months to November 2023).

Therefore, Tone has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Consumer Durables industry.

Check out our latest analysis for Tone

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

What Can We Tell From Tone's ROCE Trend?

In terms of Tone's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 10% from 18% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Tone is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 111% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Tone does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Tone 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.