Here's What To Make Of Daito Chemix's (TSE:4366) Decelerating Rates Of Return

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Daito Chemix (TSE:4366) and its ROCE trend, we weren't exactly thrilled.

What Is 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 Daito Chemix, this is the formula:

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

0.038 = JP¥728m ÷ (JP¥25b - JP¥6.4b) (Based on the trailing twelve months to June 2024).

So, Daito Chemix has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.8%.

Check out our latest analysis for Daito Chemix

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Daito Chemix's past further, check out this free graph covering Daito Chemix's past earnings, revenue and cash flow.

So How Is Daito Chemix's ROCE Trending?

There are better returns on capital out there than what we're seeing at Daito Chemix. The company has consistently earned 3.8% for the last five years, and the capital employed within the business has risen 40% in that time. 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 Daito Chemix's ROCE

Long story short, while Daito Chemix has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 2 warning signs we've spotted with Daito Chemix (including 1 which makes us a bit uncomfortable) .

While Daito Chemix 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.