Saita (FKSE:1999) Shareholders Will Want The ROCE Trajectory To Continue

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Saita (FKSE:1999) so let's look a bit deeper.

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. To calculate this metric for Saita, this is the formula:

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

0.14 = JP¥598m ÷ (JP¥6.9b - JP¥2.7b) (Based on the trailing twelve months to December 2020).

Thus, Saita has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.

View our latest analysis for Saita

Historical performance is a great place to start when researching a stock so above you can see the gauge for Saita's ROCE against it's prior returns. If you're interested in investigating Saita's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Saita is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 14% on its capital. In addition to that, Saita is employing 68% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

Overall, Saita gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Considering the stock has delivered 34% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Saita we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Saita 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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