Investors Met With Slowing Returns on Capital At Toho Titanium (TSE:5727)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Toho Titanium (TSE:5727) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Toho Titanium is:

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

0.072 = JP¥5.6b ÷ (JP¥126b - JP¥48b) (Based on the trailing twelve months to March 2024).

So, Toho Titanium has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 5.9%.

Check out our latest analysis for Toho Titanium

In the above chart we have measured Toho Titanium's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Toho Titanium .

What Can We Tell From Toho Titanium's ROCE Trend?

In terms of Toho Titanium's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 7.2% for the last five years, and the capital employed within the business has risen 25% in that time. 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.

The Bottom Line On Toho Titanium's ROCE

As we've seen above, Toho Titanium's returns on capital haven't increased but it is reinvesting in the business. And with the stock having returned a mere 19% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Toho Titanium, we've spotted 3 warning signs, and 1 of them is concerning.

While Toho Titanium may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.