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There's Been No Shortage Of Growth Recently For Kawaguchi Chemical Industry's (TSE:4361) Returns On Capital

Simply Wall St · 04/04 23:15

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Kawaguchi Chemical Industry (TSE:4361) and its trend of ROCE, we really liked what we saw.

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Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kawaguchi Chemical Industry:

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

0.10 = JP¥378m ÷ (JP¥8.5b - JP¥4.9b) (Based on the trailing twelve months to November 2024).

Therefore, Kawaguchi Chemical Industry has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.3% it's much better.

See our latest analysis for Kawaguchi Chemical Industry

roce
TSE:4361 Return on Capital Employed April 4th 2025

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

So How Is Kawaguchi Chemical Industry's ROCE Trending?

Kawaguchi Chemical Industry has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 84% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Kawaguchi Chemical Industry has a high ratio of current liabilities to total assets of 57%. 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

To bring it all together, Kawaguchi Chemical Industry has done well to increase the returns it's generating from its capital employed. And with a respectable 83% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Kawaguchi Chemical Industry, we've spotted 3 warning signs, and 2 of them are a bit concerning.

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.