We Like These Underlying Return On Capital Trends At MK Seiko (TSE:5906)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at MK Seiko (TSE:5906) so let's look a bit deeper.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MK Seiko is:

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

0.12 = JP¥2.2b ÷ (JP¥29b - JP¥9.9b) (Based on the trailing twelve months to December 2024).

Therefore, MK Seiko has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.7% it's much better.

View our latest analysis for MK Seiko

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

The Trend Of ROCE

Investors would be pleased with what's happening at MK Seiko. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at MK Seiko thanks to its ability to profitably reinvest capital.

The Bottom Line On MK Seiko's ROCE

To sum it up, MK Seiko has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing MK Seiko, we've discovered 3 warning signs that you should be aware of.

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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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.