Be Wary Of Taiheiyo Cement (TSE:5233) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Taiheiyo Cement (TSE:5233) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Taiheiyo Cement, this is the formula:

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

0.045 = JP¥43b ÷ (JP¥1.4t - JP¥411b) (Based on the trailing twelve months to December 2023).

Therefore, Taiheiyo Cement has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.8%.

See our latest analysis for Taiheiyo Cement

Above you can see how the current ROCE for Taiheiyo Cement 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 Taiheiyo Cement .

What Does the ROCE Trend For Taiheiyo Cement Tell Us?

In terms of Taiheiyo Cement's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.6% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Taiheiyo Cement is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 3.5% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Taiheiyo Cement does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.