CEDAR.Co.Ltd (TSE:2435) Is Doing The Right Things To Multiply Its Share Price

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in CEDAR.Co.Ltd's (TSE:2435) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for CEDAR.Co.Ltd, this is the formula:

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

0.066 = JP¥889m ÷ (JP¥20b - JP¥6.6b) (Based on the trailing twelve months to December 2024).

Thus, CEDAR.Co.Ltd has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.7%.

Check out our latest analysis for CEDAR.Co.Ltd

Historical performance is a great place to start when researching a stock so above you can see the gauge for CEDAR.Co.Ltd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of CEDAR.Co.Ltd.

What Does the ROCE Trend For CEDAR.Co.Ltd Tell Us?

CEDAR.Co.Ltd is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 83% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To bring it all together, CEDAR.Co.Ltd has done well to increase the returns it's generating from its capital employed. And with a respectable 79% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if CEDAR.Co.Ltd can keep these trends up, it could have a bright future ahead.

CEDAR.Co.Ltd does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is potentially serious...

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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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.