Investors Could Be Concerned With Sanyo Chemical Industries' (TSE:4471) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Sanyo Chemical Industries (TSE:4471), we weren't too upbeat about how things were going.

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 Sanyo Chemical Industries, this is the formula:

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

0.032 = JP¥4.9b ÷ (JP¥206b - JP¥54b) (Based on the trailing twelve months to March 2024).

Therefore, Sanyo Chemical Industries has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.7%.

See our latest analysis for Sanyo Chemical Industries

Above you can see how the current ROCE for Sanyo Chemical Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sanyo Chemical Industries .

How Are Returns Trending?

There is reason to be cautious about Sanyo Chemical Industries, given the returns are trending downwards. To be more specific, the ROCE was 9.2% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Sanyo Chemical Industries to turn into a multi-bagger.

What We Can Learn From Sanyo Chemical Industries' ROCE

In summary, it's unfortunate that Sanyo Chemical Industries is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Sanyo Chemical Industries you'll probably want to know about.

While Sanyo Chemical Industries 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.

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