To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Muro (TYO:7264) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Muro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = JP¥383m ÷ (JP¥24b - JP¥6.5b) (Based on the trailing twelve months to September 2020).
So, Muro has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 4.1%.
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're interested in investigating Muro's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Muro Tell Us?
When we looked at the ROCE trend at Muro, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On Muro's ROCE
In summary, we're somewhat concerned by Muro's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 7.2% in 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.
Muro does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...
While Muro 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. 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.
