Will Sugita AceLtd (TYO:7635) Multiply In Value Going Forward?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. 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)?

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 Sugita AceLtd, this is the formula:

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

0.055 = JP¥686m ÷ (JP¥28b - JP¥15b) (Based on the trailing twelve months to September 2020).

So, Sugita AceLtd has an ROCE of 5.5%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

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're interested in investigating Sugita AceLtd's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sugita AceLtd's ROCE Trend?

Over the past five years, Sugita AceLtd'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 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 55%. 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.

What We Can Learn From Sugita AceLtd's ROCE

In summary, Sugita AceLtd isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 38% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Sugita AceLtd does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Sugita AceLtd 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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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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