Tokyo Koki (TSE:7719) Shareholders Will Want The ROCE Trajectory To Continue

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Tokyo Koki (TSE:7719) looks quite promising in regards to its trends of return on capital.

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 Koki, this is the formula:

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

0.12 = JP¥276m ÷ (JP¥3.6b - JP¥1.3b) (Based on the trailing twelve months to November 2023).

Therefore, Tokyo Koki has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 9.7% generated by the Electronic industry.

See our latest analysis for Tokyo Koki

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tokyo Koki's ROCE against it's prior returns. If you'd like to look at how Tokyo Koki has performed in the past in other metrics, you can view this free graph of Tokyo Koki's past earnings, revenue and cash flow.

So How Is Tokyo Koki's ROCE Trending?

Tokyo Koki has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 45% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 35%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Tokyo Koki's ROCE

As discussed above, Tokyo Koki appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 10% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing: We've identified 3 warning signs with Tokyo Koki (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Tokyo Koki isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.