Capital Allocation Trends At Penta-Ocean Construction (TSE:1893) Aren't Ideal
To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Having said that, from a first glance at Penta-Ocean Construction (TSE:1893) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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 Penta-Ocean Construction is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = JP¥32b ÷ (JP¥828b - JP¥511b) (Based on the trailing twelve months to September 2025).
Therefore, Penta-Ocean Construction has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Construction industry.
View our latest analysis for Penta-Ocean Construction
Above you can see how the current ROCE for Penta-Ocean Construction compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Penta-Ocean Construction .
What Does the ROCE Trend For Penta-Ocean Construction Tell Us?
On the surface, the trend of ROCE at Penta-Ocean Construction doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 10%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a separate but related note, it's important to know that Penta-Ocean Construction has a current liabilities to total assets ratio of 62%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, despite lower returns in the short term, we're encouraged to see that Penta-Ocean Construction is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 112% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Penta-Ocean Construction does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...
While Penta-Ocean Construction isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.