Returns On Capital At Gun Ei Chemical Industry (TSE:4229) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 Gun Ei Chemical Industry (TSE:4229), it didn't seem to tick all of these boxes.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gun Ei Chemical Industry, this is the formula:

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

0.037 = JP¥2.0b ÷ (JP¥62b - JP¥7.8b) (Based on the trailing twelve months to December 2024).

Therefore, Gun Ei Chemical Industry has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.3%.

Check out our latest analysis for Gun Ei Chemical Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gun Ei Chemical Industry's ROCE against it's prior returns. If you're interested in investigating Gun Ei Chemical Industry's past further, check out this free graph covering Gun Ei Chemical Industry's past earnings, revenue and cash flow.

What Can We Tell From Gun Ei Chemical Industry's ROCE Trend?

There are better returns on capital out there than what we're seeing at Gun Ei Chemical Industry. Over the past five years, ROCE has remained relatively flat at around 3.7% and the business has deployed 21% 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 On Gun Ei Chemical Industry's ROCE

Long story short, while Gun Ei Chemical Industry has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Gun Ei Chemical Industry could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for 4229 on our platform quite valuable.

While Gun Ei Chemical Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.