COSMOS Pharmaceutical (TSE:3349) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at COSMOS Pharmaceutical (TSE:3349) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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 COSMOS Pharmaceutical:

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

0.12 = JP¥31b ÷ (JP¥477b - JP¥213b) (Based on the trailing twelve months to May 2024).

Therefore, COSMOS Pharmaceutical has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Consumer Retailing industry.

Check out our latest analysis for COSMOS Pharmaceutical

Above you can see how the current ROCE for COSMOS Pharmaceutical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering COSMOS Pharmaceutical for free.

How Are Returns Trending?

When we looked at the ROCE trend at COSMOS Pharmaceutical, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, COSMOS Pharmaceutical has a high ratio of current liabilities to total assets of 45%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On COSMOS Pharmaceutical's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for COSMOS Pharmaceutical. In light of this, the stock has only gained 29% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

COSMOS Pharmaceutical could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 3349 on our platform quite valuable.

While COSMOS Pharmaceutical 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.

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