What Do The Returns At Soken Chemical & Engineering (TYO:4972) Mean Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Soken Chemical & Engineering's (TYO:4972) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Soken Chemical & Engineering:

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

0.094 = JP¥2.4b ÷ (JP¥36b - JP¥10b) (Based on the trailing twelve months to September 2020).

So, Soken Chemical & Engineering has an ROCE of 9.4%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 6.3%.

Check out our latest analysis for Soken Chemical & Engineering

Above you can see how the current ROCE for Soken Chemical & Engineering compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Soken Chemical & Engineering.

What The Trend Of ROCE Can Tell Us

Soken Chemical & Engineering has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 80% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. 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. Since the stock has returned a staggering 151% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Soken Chemical & Engineering can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Soken Chemical & Engineering that we think you should be aware of.

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. 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.
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