Returns On Capital At Kumiai Chemical Industry (TSE:4996) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Kumiai Chemical Industry (TSE:4996) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Kumiai Chemical Industry is:

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

0.063 = JP¥11b ÷ (JP¥275b - JP¥96b) (Based on the trailing twelve months to October 2024).

Therefore, Kumiai Chemical Industry has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Chemicals industry average of 7.2%.

View our latest analysis for Kumiai Chemical Industry

In the above chart we have measured Kumiai Chemical Industry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kumiai Chemical Industry .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Kumiai Chemical Industry. The company has employed 68% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. 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.

What We Can Learn From Kumiai Chemical Industry's ROCE

In conclusion, Kumiai Chemical Industry has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 56% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Kumiai Chemical Industry does have some risks, we noticed 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

While Kumiai 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.

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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.