There's Been No Shortage Of Growth Recently For J.S. Corrugating Machinery's (SZSE:000821) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in J.S. Corrugating Machinery's (SZSE:000821) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for J.S. Corrugating Machinery, this is the formula:

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

0.11 = CN¥451m ÷ (CN¥16b - CN¥12b) (Based on the trailing twelve months to September 2023).

Therefore, J.S. Corrugating Machinery has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.0% it's much better.

Check out our latest analysis for J.S. Corrugating Machinery

In the above chart we have measured J.S. Corrugating Machinery's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering J.S. Corrugating Machinery for free.

So How Is J.S. Corrugating Machinery's ROCE Trending?

The trends we've noticed at J.S. Corrugating Machinery are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 25%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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. The current liabilities has increased to 73% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

Our Take On J.S. Corrugating Machinery's ROCE

To sum it up, J.S. Corrugating Machinery has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 43% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While J.S. Corrugating Machinery looks impressive, no company is worth an infinite price. The intrinsic value infographic for 000821 helps visualize whether it is currently trading for a fair price.

While J.S. Corrugating Machinery 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.