- LIVE QUOTES
- LEARN
- HELP
Nasdaq
Wall Street JournalEN
We Like These Underlying Return On Capital Trends At Tsudakoma (TSE:6217)
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. 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. With that in mind, we've noticed some promising trends at Tsudakoma (TSE:6217) so let's look a bit deeper.
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 Tsudakoma, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = JP¥171m ÷ (JP¥29b - JP¥20b) (Based on the trailing twelve months to August 2025).
Thus, Tsudakoma has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.0%.
Check out our latest analysis for Tsudakoma
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 Tsudakoma has performed in the past in other metrics, you can view this free graph of Tsudakoma's past earnings, revenue and cash flow.
The Trend Of ROCE
Like most people, we're pleased that Tsudakoma is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.0% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 49%. Tsudakoma could be selling under-performing assets since the ROCE is improving.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 70% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
The Key Takeaway
In a nutshell, we're pleased to see that Tsudakoma has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 50% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
Like most companies, Tsudakoma does come with some risks, and we've found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.