Shikoku Kasei Holdings' (TSE:4099) Returns Have Hit A Wall

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Shikoku Kasei Holdings (TSE:4099), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Shikoku Kasei Holdings, this is the formula:

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

0.092 = JP¥9.7b ÷ (JP¥136b - JP¥31b) (Based on the trailing twelve months to December 2024).

So, Shikoku Kasei Holdings has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 7.3% generated by the Chemicals industry, it's much better.

Check out our latest analysis for Shikoku Kasei Holdings

In the above chart we have measured Shikoku Kasei Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Shikoku Kasei Holdings for free.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Shikoku Kasei Holdings. Over the past five years, ROCE has remained relatively flat at around 9.2% and the business has deployed 37% 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 Key Takeaway

In summary, Shikoku Kasei Holdings 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 95% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Shikoku Kasei Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 4099 on our platform quite valuable.

While Shikoku Kasei Holdings 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.