Be Wary Of TBS HoldingsInc (TSE:9401) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at TBS HoldingsInc (TSE:9401) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 TBS HoldingsInc, this is the formula:

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

0.015 = JP¥19b ÷ (JP¥1.4t - JP¥93b) (Based on the trailing twelve months to September 2024).

Therefore, TBS HoldingsInc has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Media industry average of 9.7%.

View our latest analysis for TBS HoldingsInc

Above you can see how the current ROCE for TBS HoldingsInc 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 TBS HoldingsInc .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at TBS HoldingsInc, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 2.3% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From TBS HoldingsInc's ROCE

To conclude, we've found that TBS HoldingsInc is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 101% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for TBS HoldingsInc (of which 1 is concerning!) that you should know about.

While TBS HoldingsInc 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.