Is There More Growth In Store For Car Mate Mfg's (TYO:7297) Returns On Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, we've noticed some promising trends at Car Mate Mfg (TYO:7297) so let's look a bit deeper.

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. The formula for this calculation on Car Mate Mfg is:

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

0.059 = JP¥869m ÷ (JP¥18b - JP¥3.1b) (Based on the trailing twelve months to September 2020).

Therefore, Car Mate Mfg has an ROCE of 5.9%. On its own that's a low return, but compared to the average of 3.8% generated by the Auto Components industry, it's much better.

See our latest analysis for Car Mate Mfg

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Car Mate Mfg's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Car Mate Mfg Tell Us?

Car Mate Mfg has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 5.9% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Car Mate Mfg has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 17%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Car Mate Mfg has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

In summary, we're delighted to see that Car Mate Mfg has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 2 warning signs for Car Mate Mfg that we think you should be aware of.

While Car Mate Mfg 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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