We Like These Underlying Return On Capital Trends At Ichikawa (TSE:3513)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Ichikawa (TSE:3513) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Ichikawa is:

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

0.044 = JP¥1.1b ÷ (JP¥29b - JP¥3.8b) (Based on the trailing twelve months to March 2024).

So, Ichikawa has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.0%.

See our latest analysis for Ichikawa

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ichikawa's ROCE against it's prior returns. If you're interested in investigating Ichikawa's past further, check out this free graph covering Ichikawa's past earnings, revenue and cash flow.

The Trend Of ROCE

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 104% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line On Ichikawa's ROCE

In summary, we're delighted to see that Ichikawa has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Ichikawa does come with some risks, and we've found 1 warning sign that you should be aware of.

While Ichikawa 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.