Will the Promising Trends At Fuji Seiki (TYO:6400) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Fuji Seiki's (TYO:6400) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 Fuji Seiki is:

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

0.086 = JP¥327m ÷ (JP¥7.4b - JP¥3.6b) (Based on the trailing twelve months to September 2020).

Thus, Fuji Seiki has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.7% generated by the Machinery industry, it's much better.

Check out our latest analysis for Fuji Seiki

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 want to delve into the historical earnings, revenue and cash flow of Fuji Seiki, check out these free graphs here.

What Can We Tell From Fuji Seiki's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.6%. Basically the business is earning more per dollar of capital invested and in addition to that, 30% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, Fuji Seiki has a high ratio of current liabilities to total assets of 48%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

All in all, it's terrific to see that Fuji Seiki is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Fuji Seiki, we've discovered 3 warning signs that you should be aware of.

While Fuji Seiki 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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