The Returns At Fuji Glass (TYO:5212) Provide Us With Signs Of What's To Come

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Fuji Glass (TYO:5212), it didn't seem to tick all of these boxes.

What is 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 Fuji Glass, this is the formula:

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

0.016 = JP¥63m ÷ (JP¥4.4b - JP¥479m) (Based on the trailing twelve months to September 2020).

So, Fuji Glass has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Packaging industry average of 6.6%.

Check out our latest analysis for Fuji Glass

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fuji Glass' ROCE against it's prior returns. If you'd like to look at how Fuji Glass has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Fuji Glass' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.7%, but since then they've fallen to 1.6%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Fuji Glass' ROCE

To conclude, we've found that Fuji Glass is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 606% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Fuji Glass does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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