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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Mitsuboshi (TYO:5820) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Mitsuboshi, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = JP¥191m ÷ (JP¥9.8b - JP¥2.2b) (Based on the trailing twelve months to December 2020).
So, Mitsuboshi has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electrical industry average of 6.6%.
See our latest analysis for Mitsuboshi
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mitsuboshi's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mitsuboshi, check out these free graphs here.
How Are Returns Trending?
Over the past five years, Mitsuboshi's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Mitsuboshi in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
What We Can Learn From Mitsuboshi's ROCE
In a nutshell, Mitsuboshi has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 39% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing to note, we've identified 3 warning signs with Mitsuboshi and understanding them should be part of your investment process.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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:5820
Mitsuboshi
Manufactures and sells electric wires and synthetic resin products in Japan.
Adequate balance sheet average dividend payer.
