Kuraray (TSE:3405) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kuraray (TSE:3405), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kuraray is:

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

0.076 = JP¥83b ÷ (JP¥1.3t - JP¥198b) (Based on the trailing twelve months to March 2024).

Thus, Kuraray has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.6%.

Check out our latest analysis for Kuraray

Above you can see how the current ROCE for Kuraray compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kuraray for free.

What Does the ROCE Trend For Kuraray Tell Us?

In terms of Kuraray's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.6% for the last five years, and the capital employed within the business has risen 34% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, Kuraray's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Kuraray does have some risks though, and we've spotted 1 warning sign for Kuraray that you might be interested in.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.