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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Tokyo Sangyo (TSE:8070), it didn’t seem to tick all of these boxes.
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Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Tokyo Sangyo, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.071 = JP¥2.0b ÷ (JP¥73b – JP¥46b) (Based on the trailing twelve months to December 2024).
Thus, Tokyo Sangyo has an ROCE of 7.1%. In absolute terms, that’s a low return but it’s around the Machinery industry average of 7.8%.
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TSE:8070 Return on Capital Employed April 7th 2025
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Tokyo Sangyo .
What Does the ROCE Trend For Tokyo Sangyo Tell Us?
Over the past five years, Tokyo Sangyo’s ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they’re past the growth phase. So unless we see a substantial change at Tokyo Sangyo in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger.
On a separate but related note, it’s important to know that Tokyo Sangyo has a current liabilities to total assets ratio of 62%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
We can conclude that in regards to Tokyo Sangyo’s returns on capital employed and the trends, there isn’t much change to report on. Although the market must be expecting these trends to improve because the stock has gained 58% over the last five years. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
One more thing to note, we’ve identified 2 warning signs with Tokyo Sangyo and understanding them should be part of your investment process.
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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.
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