Should You Be Impressed By Tofu Restaurant's (GTSM:2752) Returns on Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, while the ROCE is currently high for Tofu Restaurant (GTSM:2752), we aren't jumping out of our chairs because returns are decreasing.

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. The formula for this calculation on Tofu Restaurant is:

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

0.23 = NT$218m ÷ (NT$1.2b - NT$257m) (Based on the trailing twelve months to September 2020).

So, Tofu Restaurant has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Hospitality industry average of 5.6%.

See our latest analysis for Tofu Restaurant

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tofu Restaurant's ROCE against it's prior returns. If you're interested in investigating Tofu Restaurant's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tofu Restaurant's ROCE Trend?

On the surface, the trend of ROCE at Tofu Restaurant doesn't inspire confidence. Historically returns on capital were even higher at 53%, but they have dropped over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Tofu Restaurant has done well to pay down its current liabilities to 21% 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.

In Conclusion...

While returns have fallen for Tofu Restaurant in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 56% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Tofu Restaurant does come with some risks, and we've found 1 warning sign that you should be aware of.

Tofu Restaurant is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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.
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