Why We Like The Returns At Tsugami (TSE:6101)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. And in light of that, the trends we're seeing at Tsugami's (TSE:6101) look very promising so lets take a look.

We've discovered 1 warning sign about Tsugami. View them for free.

Understanding 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. Analysts use this formula to calculate it for Tsugami:

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

0.20 = JP¥18b ÷ (JP¥126b - JP¥37b) (Based on the trailing twelve months to December 2024).

Therefore, Tsugami has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Machinery industry average of 7.8%.

Check out our latest analysis for Tsugami

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Tsugami has performed in the past in other metrics, you can view this free graph of Tsugami's past earnings, revenue and cash flow.

What Can We Tell From Tsugami's ROCE Trend?

Investors would be pleased with what's happening at Tsugami. The data shows that returns on capital have increased substantially over the last five years to 20%. The amount of capital employed has increased too, by 105%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Tsugami's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Tsugami has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Tsugami can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 1 warning sign with Tsugami and understanding this should be part of your investment process.

Tsugami is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.