Be Wary Of SundrugLtd (TSE:9989) And Its Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think SundrugLtd (TSE:9989) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on SundrugLtd is:

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

0.16 = JP¥41b ÷ (JP¥377b - JP¥119b) (Based on the trailing twelve months to December 2023).

Therefore, SundrugLtd has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 8.8% it's much better.

View our latest analysis for SundrugLtd

In the above chart we have measured SundrugLtd'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 SundrugLtd .

So How Is SundrugLtd's ROCE Trending?

When we looked at the ROCE trend at SundrugLtd, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. However it looks like SundrugLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On SundrugLtd's ROCE

To conclude, we've found that SundrugLtd is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 72% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, SundrugLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

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.