Will Hokkai Electrical Construction CompanyIncorporated's (SPSE:1832) Growth In ROCE Persist?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Hokkai Electrical Construction CompanyIncorporated (SPSE:1832) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Hokkai Electrical Construction CompanyIncorporated:

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

0.047 = JP¥1.4b ÷ (JP¥38b - JP¥7.4b) (Based on the trailing twelve months to September 2020).

So, Hokkai Electrical Construction CompanyIncorporated has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

View our latest analysis for Hokkai Electrical Construction CompanyIncorporated

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hokkai Electrical Construction CompanyIncorporated's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hokkai Electrical Construction CompanyIncorporated, check out these free graphs here.

So How Is Hokkai Electrical Construction CompanyIncorporated's ROCE Trending?

We're delighted to see that Hokkai Electrical Construction CompanyIncorporated is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Hokkai Electrical Construction CompanyIncorporated is utilizing 27% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Long story short, we're delighted to see that Hokkai Electrical Construction CompanyIncorporated's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 53% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Hokkai Electrical Construction CompanyIncorporated looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 1832 is currently trading for a fair price.

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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