Taiheiyo Cement (TSE:5233) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Taiheiyo Cement (TSE:5233), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Taiheiyo Cement:

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

0.066 = JP¥66b ÷ (JP¥1.4t - JP¥373b) (Based on the trailing twelve months to June 2024).

So, Taiheiyo Cement has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 8.2%.

Check out our latest analysis for Taiheiyo Cement

In the above chart we have measured Taiheiyo Cement'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 Taiheiyo Cement .

How Are Returns Trending?

On the surface, the trend of ROCE at Taiheiyo Cement doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.6% from 9.1% five years ago. However it looks like Taiheiyo Cement might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Taiheiyo Cement's ROCE

Bringing it all together, while we're somewhat encouraged by Taiheiyo Cement's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 25% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Taiheiyo Cement does have some risks though, and we've spotted 1 warning sign for Taiheiyo Cement that you might be interested in.

While Taiheiyo Cement 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.