If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Muro (TSE:7264), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)
0.061 = JP¥1.4b ÷ (JP¥32b - JP¥8.9b) (Based on the trailing twelve months to March 2024).
Therefore, Muro has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Auto Components industry average of 6.5%.
See 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 covering Muro's past earnings, revenue and cash flow.
What Does the ROCE Trend For Muro Tell Us?
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 6.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
In Conclusion...
Bringing it all together, while we're somewhat encouraged by Muro's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 7.2% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a final note, we found 2 warning signs for Muro (1 doesn't sit too well with us) you should be aware of.
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. 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.
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About TSE:7264
Excellent balance sheet established dividend payer.
