Can Semba Tohka Industries (TYO:2916) Continue To Grow Its Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Semba Tohka Industries (TYO:2916) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Semba Tohka Industries:

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

0.074 = JP¥1.0b ÷ (JP¥23b - JP¥8.8b) (Based on the trailing twelve months to December 2020).

So, Semba Tohka Industries has an ROCE of 7.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.

Check out our latest analysis for Semba Tohka Industries

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

What Can We Tell From Semba Tohka Industries' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 7.4%. The amount of capital employed has increased too, by 32%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

All in all, it's terrific to see that Semba Tohka Industries is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 4 warning signs with Semba Tohka Industries and understanding them should be part of your investment process.

While Semba Tohka Industries 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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