We Think Morimatsu International Holdings (HKG:2155) Might Have The DNA Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 the ROCE trend of Morimatsu International Holdings (HKG:2155) we really liked what we saw.

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 Morimatsu International Holdings is:

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

0.23 = CN¥965m ÷ (CN¥9.0b - CN¥4.7b) (Based on the trailing twelve months to June 2023).

Therefore, Morimatsu International Holdings has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 7.1% earned by companies in a similar industry.

See our latest analysis for Morimatsu International Holdings

Above you can see how the current ROCE for Morimatsu International Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Morimatsu International Holdings here for free.

How Are Returns Trending?

We like the trends that we're seeing from Morimatsu International Holdings. The data shows that returns on capital have increased substantially over the last five years to 23%. 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 186%. So we're very much inspired by what we're seeing at Morimatsu International Holdings thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Morimatsu International Holdings has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Morimatsu International Holdings' ROCE

All in all, it's terrific to see that Morimatsu International Holdings is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 34% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Morimatsu International Holdings (of which 1 is concerning!) that you should know about.

Morimatsu International Holdings is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.