Sanei (TSE:6230) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So on that note, Sanei (TSE:6230) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Sanei is:

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

0.12 = JP¥1.9b ÷ (JP¥24b - JP¥7.9b) (Based on the trailing twelve months to December 2023).

Therefore, Sanei has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Building industry average of 7.1% it's much better.

View our latest analysis for Sanei

In the above chart we have measured Sanei's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sanei for free.

What Can We Tell From Sanei's ROCE Trend?

Investors would be pleased with what's happening at Sanei. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed has increased too, by 53%. So we're very much inspired by what we're seeing at Sanei thanks to its ability to profitably reinvest capital.

Our Take On Sanei's ROCE

To sum it up, Sanei 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 36% to shareholders over the last three years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Sanei does have some risks though, and we've spotted 2 warning signs for Sanei that you might be interested in.

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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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.