Returns On Capital At COSMOS Pharmaceutical (TSE:3349) Paint A Concerning Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at COSMOS Pharmaceutical (TSE:3349), it didn't seem to tick all of these boxes.

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. To calculate this metric for COSMOS Pharmaceutical, this is the formula:

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

0.13 = JP¥31b ÷ (JP¥436b - JP¥198b) (Based on the trailing twelve months to November 2023).

Thus, COSMOS Pharmaceutical has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Consumer Retailing industry.

See our latest analysis for COSMOS Pharmaceutical

In the above chart we have measured COSMOS Pharmaceutical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for COSMOS Pharmaceutical .

The Trend Of ROCE

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 19%, but since then they've fallen to 13%. 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 effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. And the stock has followed suit returning a meaningful 55% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in COSMOS Pharmaceutical it's worth checking out our FREE intrinsic value approximation for 3349 to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.