We're Watching These Trends At Toshin HoldingsLtd (TYO:9444)

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Toshin HoldingsLtd (TYO:9444), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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 Toshin HoldingsLtd is:

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

0.035 = JP¥518m ÷ (JP¥23b - JP¥8.0b) (Based on the trailing twelve months to October 2020).

Therefore, Toshin HoldingsLtd has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.0%.

Check out our latest analysis for Toshin HoldingsLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Toshin HoldingsLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Toshin HoldingsLtd Tell Us?

In terms of Toshin HoldingsLtd's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.5% from 4.9% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Toshin HoldingsLtd has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Toshin HoldingsLtd because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 25% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Toshin HoldingsLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Toshin HoldingsLtd 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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