Returns At SOMAR (TSE:8152) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, SOMAR (TSE:8152) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SOMAR is:

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

0.098 = JP¥2.2b ÷ (JP¥28b - JP¥5.6b) (Based on the trailing twelve months to June 2024).

So, SOMAR has an ROCE of 9.8%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 6.8%.

Check out our latest analysis for SOMAR

Historical performance is a great place to start when researching a stock so above you can see the gauge for SOMAR's ROCE against it's prior returns. If you're interested in investigating SOMAR's past further, check out this free graph covering SOMAR's past earnings, revenue and cash flow.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 78%. So we're very much inspired by what we're seeing at SOMAR thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 20%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

All in all, it's terrific to see that SOMAR is reaping the rewards from prior investments and is growing its capital base. And a remarkable 284% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for SOMAR that we think you should be aware of.

While SOMAR 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.