If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Muro (TYO:7264) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for Muro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = JP¥807m ÷ (JP¥26b - JP¥8.2b) (Based on the trailing twelve months to December 2020).
Thus, Muro has an ROCE of 4.6%. Even though it's in line with the industry average of 4.7%, it's still a low return by itself.
View our latest analysis for Muro
Historical performance is a great place to start when researching a stock so above you can see the gauge for Muro's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Muro, check out these free graphs here.
What Can We Tell From Muro's ROCE Trend?
On the surface, the trend of ROCE at Muro doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 4.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Muro's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Muro have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 40% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a final note, we found 4 warning signs for Muro (1 shouldn't be ignored) you should be aware of.
While Muro may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. 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.
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About TSE:7264
Excellent balance sheet average dividend payer.
