Returns On Capital At Sugita AceLtd (TYO:7635) Paint An Interesting Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after briefly looking over the numbers, we don't think Sugita AceLtd (TYO:7635) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Sugita AceLtd is:

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

0.054 = JP¥687m ÷ (JP¥29b - JP¥17b) (Based on the trailing twelve months to December 2020).

So, Sugita AceLtd has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 6.4%.

See our latest analysis for Sugita AceLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sugita AceLtd's ROCE against it's prior returns. If you'd like to look at how Sugita AceLtd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Sugita AceLtd's ROCE Trending?

There hasn't been much to report for Sugita AceLtd's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Sugita AceLtd doesn't end up being a multi-bagger in a few years time.

Another thing to note, Sugita AceLtd has a high ratio of current liabilities to total assets of 57%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Sugita AceLtd's ROCE

We can conclude that in regards to Sugita AceLtd's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 48% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Sugita AceLtd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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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