Why We Like The Returns At Morimatsu International Holdings (HKG:2155)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of Morimatsu International Holdings (HKG:2155) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Morimatsu International Holdings is:

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

0.24 = CN¥482m ÷ (CN¥5.7b - CN¥3.7b) (Based on the trailing twelve months to December 2021).

Thus, Morimatsu International Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Machinery industry average of 8.8%.

See our latest analysis for Morimatsu International Holdings

In the above chart we have measured Morimatsu International Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Morimatsu International Holdings' ROCE 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 four years to 24%. The amount of capital employed has increased too, by 38%. 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 side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 65% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

Our Take On Morimatsu International Holdings' ROCE

In summary, it's great to see that Morimatsu International Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 17% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 2 warning signs for Morimatsu International Holdings that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.