Slowing Rates Of Return At C.S. Lumber (TYO:7808) Leave Little Room For Excitement

By
Simply Wall St
Published
May 04, 2021
JASDAQ:7808
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over C.S. Lumber's (TYO:7808) trend of ROCE, we liked what we saw.

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 C.S. Lumber:

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

0.14 = JP¥1.2b ÷ (JP¥15b - JP¥6.2b) (Based on the trailing twelve months to February 2021).

So, C.S. Lumber has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 5.3% it's much better.

View our latest analysis for C.S. Lumber

roce
JASDAQ:7808 Return on Capital Employed May 5th 2021

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'd like to look at how C.S. Lumber has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For C.S. Lumber Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 140% in that time. 14% is a pretty standard return, and it provides some comfort knowing that C.S. Lumber has consistently earned this amount. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 41% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. Although because current liabilities are still 41%, some of that risk is still prevalent.

Our Take On 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. Therefore it's no surprise that shareholders have earned a respectable 29% return if they held over the last three years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 3 warning signs facing C.S. Lumber that you might find interesting.

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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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.