Soken Chemical & Engineering (TYO:4972) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Soken Chemical & Engineering (TYO:4972) so let's look a bit deeper.

Understanding 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. To calculate this metric for Soken Chemical & Engineering, this is the formula:

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

0.10 = JP¥2.7b ÷ (JP¥37b - JP¥11b) (Based on the trailing twelve months to December 2020).

So, Soken Chemical & Engineering has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.3% it's much better.

View our latest analysis for Soken Chemical & Engineering

In the above chart we have measured Soken Chemical & Engineering's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Soken Chemical & Engineering.

So How Is Soken Chemical & Engineering's ROCE Trending?

Soken Chemical & Engineering has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 86% over the last five years. 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.

What We Can Learn From Soken Chemical & Engineering's ROCE

As discussed above, Soken Chemical & Engineering appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 178% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Soken Chemical & Engineering that you might find interesting.

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