Is MICS Chemical (TYO:7899) Set To Make A Turnaround?

What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, MICS Chemical (TYO:7899) we aren't filled with optimism, but let's investigate further.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for MICS Chemical:

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

0.0086 = JP¥27m ÷ (JP¥3.7b - JP¥555m) (Based on the trailing twelve months to October 2020).

Thus, MICS Chemical has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.4%.

Check out our latest analysis for MICS Chemical

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how MICS Chemical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From MICS Chemical's ROCE Trend?

In terms of MICS Chemical's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 1.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect MICS Chemical to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that MICS Chemical is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 41% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with MICS Chemical (including 1 which doesn't sit too well with us) .

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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