The Returns On Capital At Tri Chemical Laboratories (TSE:4369) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Tri Chemical Laboratories (TSE:4369), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Tri Chemical Laboratories is:

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

0.066 = JP¥1.9b ÷ (JP¥32b - JP¥2.6b) (Based on the trailing twelve months to January 2024).

Therefore, Tri Chemical Laboratories has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.

Check out our latest analysis for Tri Chemical Laboratories

Above you can see how the current ROCE for Tri Chemical Laboratories 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 Tri Chemical Laboratories .

What The Trend Of ROCE Can Tell Us

In terms of Tri Chemical Laboratories' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 25% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Tri Chemical Laboratories has decreased its current liabilities to 8.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Tri Chemical Laboratories' ROCE

In summary, we're somewhat concerned by Tri Chemical Laboratories' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 249% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.