What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at PuequLTD (TYO:9264) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
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 PuequLTD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = JP¥283m ÷ (JP¥8.7b - JP¥3.3b) (Based on the trailing twelve months to November 2020).
Thus, PuequLTD has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Machinery industry average of 6.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for PuequLTD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of PuequLTD, check out these free graphs here.
How Are Returns Trending?
There are better returns on capital out there than what we're seeing at PuequLTD. Over the past five years, ROCE has remained relatively flat at around 5.2% and the business has deployed 45% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
Our Take On PuequLTD's ROCE
As we've seen above, PuequLTD's returns on capital haven't increased but it is reinvesting in the business. And in the last three years, the stock has given away 36% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
One more thing: We've identified 5 warning signs with PuequLTD (at least 1 which can't be ignored) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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