Slowing Rates Of Return At TOWA Hi SYSTEMLTD (TSE:4172) Leave Little Room For Excitement

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over TOWA Hi SYSTEMLTD's (TSE:4172) trend of ROCE, we liked what we saw.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for TOWA Hi SYSTEMLTD, this is the formula:

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

0.13 = JP¥538m ÷ (JP¥4.3b - JP¥308m) (Based on the trailing twelve months to December 2024).

So, TOWA Hi SYSTEMLTD has an ROCE of 13%. In isolation, that's a pretty standard return but against the Healthcare Services industry average of 17%, it's not as good.

View our latest analysis for TOWA Hi SYSTEMLTD

Above you can see how the current ROCE for TOWA Hi SYSTEMLTD 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 TOWA Hi SYSTEMLTD for free.

What Can We Tell From TOWA Hi SYSTEMLTD's ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has consistently earned 13% for the last five years, and the capital employed within the business has risen 59% in that time. 13% is a pretty standard return, and it provides some comfort knowing that TOWA Hi SYSTEMLTD 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, TOWA Hi SYSTEMLTD has proven its ability to adequately reinvest capital at good rates of return. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

TOWA Hi SYSTEMLTD does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

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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.