Returns At Tokyo Seimitsu (TSE:7729) Appear To Be Weighed Down

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Tokyo Seimitsu's (TSE:7729) ROCE trend, we were pretty happy with what we saw.

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. To calculate this metric for Tokyo Seimitsu, this is the formula:

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

0.15 = JP¥26b ÷ (JP¥217b - JP¥45b) (Based on the trailing twelve months to December 2023).

Therefore, Tokyo Seimitsu has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Semiconductor industry.

View our latest analysis for Tokyo Seimitsu

In the above chart we have measured Tokyo Seimitsu's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tokyo Seimitsu .

What Does the ROCE Trend For Tokyo Seimitsu Tell Us?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 52% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Tokyo Seimitsu has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Tokyo Seimitsu's ROCE

The main thing to remember is that Tokyo Seimitsu has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 304% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Tokyo Seimitsu does have some risks though, and we've spotted 2 warning signs for Tokyo Seimitsu that you might be interested in.

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.