The Returns On Capital At Kanto Denka Kogyo (TSE:4047) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Kanto Denka Kogyo (TSE:4047), we don't think it's current trends fit the mold of a multi-bagger.

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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. Analysts use this formula to calculate it for Kanto Denka Kogyo:

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

0.013 = JP¥1.2b ÷ (JP¥126b - JP¥30b) (Based on the trailing twelve months to December 2024).

So, Kanto Denka Kogyo has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.3%.

See our latest analysis for Kanto Denka Kogyo

Above you can see how the current ROCE for Kanto Denka Kogyo compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kanto Denka Kogyo .

What Does the ROCE Trend For Kanto Denka Kogyo Tell Us?

On the surface, the trend of ROCE at Kanto Denka Kogyo doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 1.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Kanto Denka Kogyo's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Kanto Denka Kogyo have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 12% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you're still interested in Kanto Denka Kogyo it's worth checking out our FREE intrinsic value approximation for 4047 to see if it's trading at an attractive price in other respects.

While Kanto Denka Kogyo may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.