ROCE (Return On Capital Employed) analysis of Token (TSE:1766)

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.

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. Among 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, and in addition to that, it is expanding the size of its operations and initiatives. A trait of a compounding machine.

Speaking of which, we noticed some great changes in Token's (TSE:1766) returns on capital, so let's have a look.

Introducing Return On Capital Employed (ROCE)

For those that aren't familiar, ROCE is a metric for measuring how's "efficiently" a company can deploy the capital it has raised, either through equity or debt to generate profit. It's a useful way to examine how well a company is using its capital, and in addition to that, it can highlight companies that are setting themselves up for future growth.

The formula for calculating it is:

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

So, Token has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry avg of 6.3% it's much better.

View our latest analysis for Token

In the above chart we have measured Token's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Token .

How Is Token's ROCE Trending?

Token is displaying some good trends. As you can see, the capital employed has increased from JP¥160b to JP¥217b over the last five years, and at the same time returns on capital have shot up substantially from 5.6% to 14%. Ideally, we'd like to see capital being reduced over time, and that's the case here. As the company is investing more into its operations to grow the business, it has reduced capital employed in the last year, and in addition to that, earnings have grown which can help to maintain a strong return on capital.

The takeaway from this is that Token is collecting returns from the capital it has deployed, and it's also expanding the size of its operations and initiatives.

The Final Word On Token's ROCE

To summarize, Token has shown codnduence in the business by increasing capital, and in addition to that, new capital is being used efficiently as it's generating a higher return.