Rasa Industries (TSE:4022) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Rasa Industries (TSE:4022) and its trend of ROCE, we really liked 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 Rasa Industries, this is the formula:

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

0.13 = JP¥4.1b ÷ (JP¥45b - JP¥12b) (Based on the trailing twelve months to June 2024).

So, Rasa Industries has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.8% it's much better.

View our latest analysis for Rasa Industries

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 Rasa Industries has performed in the past in other metrics, you can view this free graph of Rasa Industries' past earnings, revenue and cash flow.

What Can We Tell From Rasa Industries' ROCE Trend?

Rasa Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 33%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Rasa Industries' ROCE

To sum it up, Rasa Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 136% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

While Rasa Industries isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.