Here's What To Make Of Toho Acetylene's (TSE:4093) Decelerating Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Toho Acetylene (TSE:4093), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Toho Acetylene is:

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

0.084 = JP¥1.9b ÷ (JP¥34b - JP¥11b) (Based on the trailing twelve months to March 2025).

Therefore, Toho Acetylene has an ROCE of 8.4%. On its own, that's a low figure but it's around the 7.3% average generated by the Chemicals industry.

Check out our latest analysis for Toho Acetylene

Historical performance is a great place to start when researching a stock so above you can see the gauge for Toho Acetylene's ROCE against it's prior returns. If you'd like to look at how Toho Acetylene has performed in the past in other metrics, you can view this free graph of Toho Acetylene's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Toho Acetylene's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 23% more capital into its operations. 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

In summary, Toho Acetylene has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Toho Acetylene you'll probably want to know about.

While Toho Acetylene 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.