Daishin ChemicalLtd (TSE:4629) Could Be At Risk Of Shrinking As A Company

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Daishin ChemicalLtd (TSE:4629) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Daishin ChemicalLtd, this is the formula:

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

0.051 = JP¥825m ÷ (JP¥24b - JP¥7.9b) (Based on the trailing twelve months to March 2024).

Thus, Daishin ChemicalLtd has an ROCE of 5.1%. 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 Daishin ChemicalLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Daishin ChemicalLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Daishin ChemicalLtd.

So How Is Daishin ChemicalLtd's ROCE Trending?

In terms of Daishin ChemicalLtd's historical ROCE movements, the trend doesn't inspire confidence. About one year ago, returns on capital were 8.0%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last one year. If these trends continue, we wouldn't expect Daishin ChemicalLtd to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Daishin ChemicalLtd is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 29% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 5 warning signs for Daishin ChemicalLtd (1 is potentially serious) you should be aware of.

While Daishin ChemicalLtd 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.

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