Will The ROCE Trend At Cosmo Bio CompanyLimited (TYO:3386) Continue?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Cosmo Bio CompanyLimited's (TYO:3386) returns on capital, so let's have a look.

What is 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 Cosmo Bio CompanyLimited is:

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

0.08 = JP¥667m ÷ (JP¥9.4b - JP¥1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Cosmo Bio CompanyLimited has an ROCE of 8.0%. In absolute terms, that's a low return but it's around the Healthcare industry average of 9.4%.

View our latest analysis for Cosmo Bio CompanyLimited

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Cosmo Bio CompanyLimited has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.0%. 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.

In Conclusion...

In summary, it's great to see that Cosmo Bio CompanyLimited can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Cosmo Bio CompanyLimited can keep these trends up, it could have a bright future ahead.

If you want to continue researching Cosmo Bio CompanyLimited, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Cosmo Bio CompanyLimited 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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