The Returns On Capital At Shikoku Kasei Holdings (TSE:4099) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

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 Shikoku Kasei Holdings is:

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

0.083 = JP¥8.0b ÷ (JP¥131b - JP¥34b) (Based on the trailing twelve months to March 2024).

So, Shikoku Kasei Holdings has an ROCE of 8.3%. On its own that's a low return, but compared to the average of 6.5% generated by the Chemicals industry, it's much better.

View our latest analysis for Shikoku Kasei Holdings

Above you can see how the current ROCE for Shikoku Kasei Holdings 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 Shikoku Kasei Holdings for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Shikoku Kasei Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.3% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Shikoku Kasei Holdings' ROCE

To conclude, we've found that Shikoku Kasei Holdings is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 121% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

While Shikoku Kasei Holdings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com