Investors Shouldn't Overlook The Favourable Returns On Capital At Toyokumo (TSE:4058)

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Toyokumo (TSE:4058) looks attractive right now, so lets see what the trend of returns can tell us.

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Understanding 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. Analysts use this formula to calculate it for Toyokumo:

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

0.38 = JP¥1.2b ÷ (JP¥4.7b - JP¥1.6b) (Based on the trailing twelve months to December 2024).

So, Toyokumo has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Software industry average of 16%.

See our latest analysis for Toyokumo

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 Toyokumo has performed in the past in other metrics, you can view this free graph of Toyokumo's past earnings, revenue and cash flow.

The Trend Of ROCE

We'd be pretty happy with returns on capital like Toyokumo. The company has consistently earned 38% for the last two years, and the capital employed within the business has risen 87% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Toyokumo can keep this up, we'd be very optimistic about its future.

Our Take On Toyokumo's ROCE

In summary, we're delighted to see that Toyokumo has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And since the stock has risen strongly over the last three years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Toyokumo and understanding this should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.