Capital Allocation Trends At Taoka Chemical Company (TSE:4113) Aren't Ideal

There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Taoka Chemical Company (TSE:4113) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Taoka Chemical Company:

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

0.064 = JP¥1.4b ÷ (JP¥30b - JP¥8.1b) (Based on the trailing twelve months to September 2024).

Therefore, Taoka Chemical Company has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Chemicals industry average of 7.2%.

Check out our latest analysis for Taoka Chemical Company

Above you can see how the current ROCE for Taoka Chemical Company 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 Taoka Chemical Company for free.

What Can We Tell From Taoka Chemical Company's ROCE Trend?

In terms of Taoka Chemical Company's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.4% from 14% five years ago. However it looks like Taoka Chemical Company might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Taoka Chemical Company's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think Taoka Chemical Company has the makings of a multi-bagger.

If you want to know some of the risks facing Taoka Chemical Company we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Taoka Chemical Company 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.