Toei AnimationLtd (TSE:4816) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Toei AnimationLtd (TSE:4816) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Toei AnimationLtd is:

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

0.17 = JP¥23b ÷ (JP¥163b - JP¥29b) (Based on the trailing twelve months to March 2024).

Therefore, Toei AnimationLtd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Entertainment industry.

View our latest analysis for Toei AnimationLtd

Above you can see how the current ROCE for Toei AnimationLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Toei AnimationLtd .

What Does the ROCE Trend For Toei AnimationLtd Tell Us?

We weren't thrilled with the trend because Toei AnimationLtd's ROCE has reduced by 23% over the last five years, while the business employed 92% more capital. That being said, Toei AnimationLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Toei AnimationLtd might not have received a full period of earnings contribution from it.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Toei AnimationLtd's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 130% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 2 warning signs for Toei AnimationLtd you'll probably want to know about.

While Toei AnimationLtd 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.

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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.