Returns On Capital At C.S. Lumber (TYO:7808) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. That's why when we briefly looked at C.S. Lumber's (TYO:7808) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for C.S. Lumber, this is the formula:

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

0.13 = JP¥1.2b ÷ (JP¥14b - JP¥5.6b) (Based on the trailing twelve months to November 2020).

So, C.S. Lumber has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 5.4% it's much better.

Check out our latest analysis for C.S. Lumber

Historical performance is a great place to start when researching a stock so above you can see the gauge for C.S. Lumber's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of C.S. Lumber, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 151% more capital into its operations. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

On a side note, C.S. Lumber has done well to reduce current liabilities to 39% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From C.S. Lumber's ROCE

The main thing to remember is that C.S. Lumber has proven its ability to continually reinvest at respectable rates of return. Yet over the last three years the stock has declined 17%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

Like most companies, C.S. Lumber does come with some risks, and we've found 3 warning signs that 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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