Rohto PharmaceuticalLtd (TSE:4527) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Rohto PharmaceuticalLtd (TSE:4527) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

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 Rohto PharmaceuticalLtd, this is the formula:

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

0.12 = JP¥38b ÷ (JP¥422b - JP¥95b) (Based on the trailing twelve months to March 2025).

Thus, Rohto PharmaceuticalLtd has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Personal Products industry.

Check out our latest analysis for Rohto PharmaceuticalLtd

In the above chart we have measured Rohto PharmaceuticalLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Rohto PharmaceuticalLtd for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Rohto PharmaceuticalLtd doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Rohto PharmaceuticalLtd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 25% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we've found 1 warning sign for Rohto PharmaceuticalLtd that we think you should be aware of.

While Rohto PharmaceuticalLtd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.