Taiheiyo Cement (TSE:5233) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Taiheiyo Cement (TSE:5233), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its 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)

0.058 = JP¥56b ÷ (JP¥1.3t - JP¥368b) (Based on the trailing twelve months to March 2024).

So, Taiheiyo Cement has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.2%.

Check out 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 The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Taiheiyo Cement, we didn't gain much confidence. Around five years ago the returns on capital were 9.6%, but since then they've fallen to 5.8%. 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.

Our Take On Taiheiyo Cement's ROCE

To conclude, we've found that Taiheiyo Cement is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Taiheiyo Cement, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com