If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Japan Tobacco's (TSE:2914) trend of ROCE, we liked what we saw.
Understanding 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 Japan Tobacco is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = JP¥664b ÷ (JP¥7.9t - JP¥1.7t) (Based on the trailing twelve months to June 2024).
So, Japan Tobacco has an ROCE of 11%. In isolation, that's a pretty standard return but against the Tobacco industry average of 14%, it's not as good.
See our latest analysis for Japan Tobacco
Above you can see how the current ROCE for Japan Tobacco 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 Japan Tobacco for free.
The Trend Of ROCE
While the returns on capital are good, they haven't moved much. The company has employed 52% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that Japan Tobacco has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Japan Tobacco has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 162% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
Like most companies, Japan Tobacco does come with some risks, and we've found 1 warning sign that you should be aware of.
While Japan Tobacco 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.
About TSE:2914
Japan Tobacco
A tobacco company, manufactures and sells tobacco products, pharmaceuticals, and processed foods in Japan and internationally.
Flawless balance sheet, good value and pays a dividend.
