Cosmo Bio CompanyLimited (TYO:3386) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Cosmo Bio CompanyLimited (TYO:3386) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Cosmo Bio CompanyLimited, this is the formula:

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

0.089 = JP¥753m ÷ (JP¥9.6b - JP¥1.2b) (Based on the trailing twelve months to December 2020).

Thus, Cosmo Bio CompanyLimited has an ROCE of 8.9%. On its own, that's a low figure but it's around the 9.7% average generated by the Healthcare industry.

See our latest analysis for Cosmo Bio CompanyLimited

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cosmo Bio CompanyLimited's ROCE against it's prior returns. If you're interested in investigating Cosmo Bio CompanyLimited's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Cosmo Bio CompanyLimited's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 24% more capital is being employed now too. So we're very much inspired by what we're seeing at Cosmo Bio CompanyLimited thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that Cosmo Bio CompanyLimited is reaping the rewards from prior investments and is growing its capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 11% to shareholders. So with that in mind, we think the stock deserves further research.

Cosmo Bio CompanyLimited does have some risks though, and we've spotted 3 warning signs for Cosmo Bio CompanyLimited that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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